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March 28, 2013

Renewable Energy Group Profits Exceed Subsidies

by Debra Fiakas CFA

Earlier this month biodiesel producer Renewable Energy Group, Inc. (REGI:  Nasdaq) reported a tidy profit of $22.3 million on record $1.0 billion in total sales.  Reported net income was $43.5 million, including accounting treatments for corporate recapitalization undertaken in the year.  Results from 2012 were noteworthy on a couple of counts. 

It was the first time in the company’s ten-year history (including years of operation among predecessor firms) that sales exceeded $1.0 billion.  REGI produced 188 million gallons of biodiesel from a variety of feedstock, including non-edible corn oil, used cooking oil, animal fats and soybeans.  Feedstock flexibility has helped drive down direct costs.  Gross margin in 2012 skyrocketed to 14.8% compared to 7.4% in 2012 and 4.3% in 2010.
Renewable Energy Group Houston Plant

The company’s profits also exceeded government subsidies for biodiesel production, providing a strong endorsement of REGI’s low-cost business model.  Even without the $8.3 million in total government biodiesel subsidies received in 2012, REGI would have reported a profit.  Granted, the company’s predecessor firms on a combined basis achieved this “profit” status twice before in 2005 and 2007.

In my view, the two achievements demonstrate that with scale, renewable fuel producers can turn a profit and deliver value to shareholders.  REGI is dependent upon a supplier network for feedstock.  However, like the squeaky wheel, a large buyer gets attention and probably the best the market has to offer.  Management has made a point of how well-tuned their feedstock buyers are to drum beat of daily supply and pricing.  That certainly helps get the low-priced feedstock REGI needs.

The four analysts with published estimates for REGI seem to think the company can maintain production and sales in 2013, but real top-line growth is not expected until next year.  The consensus estimate for 2013 is $1.43 on $1.1 billion in total sales.  That means REGI shares are trading at 5.2 times the current year earnings estimate.  That seems like a bargain to me for a company with a ten-year production history, growth prospects and profits.

There has been building momentum in REGI shares since last fall and the stock has nearly doubled.  However, every month or so, the stock takes a breather, providing value-oriented investors to nibble away a few shares are interesting prices.  A long-term price objective near $12 or $13 is not unreasonable.
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. 

March 27, 2013

The iCloud's Green Lining

Meg Cichon

hp_photo_solar_federal_ornl[1].jpg Just one year after Greenpeace called out Apple, Inc. (AAPL) for its use of fossil fuels in its "How Green Is Your Cloud" report – which graded Apple no higher than a "D" in four categories consisting of energy transparency, infrastructure siting, energy efficiency, and renewables and advocacy – Apple announced that its data centers are now powered by 100 percent renewable energy. In fact, renewables contribute to 75 percent of its entire corporate operations energy needs, according to its website.

The 2012 report cites Apple’s planned expansion into “iDataCenters” to support its booming iCloud services, which at the time were thought to be powered mostly by fossil fuels. Apple was given poor rankings due to its apparent lack of initiative in clean energy and efficiency. Due to this lack of commitment,  “Apple [was] finding itself behind other companies such as Facebook (FB) and Google (GOOG) who are angling to control a bigger piece of the cloud. Instead of playing catch up, Apple has the ingenuity, on-hand cash and innovative spirit to Think Different and make substantial improvements in the type of energy that powers its cloud,” according to Greenpeace.

Shortly after the report was released — and Greenpeace hosted several colorful protests — Apple announced it would power its three new data centers in North Carolina, Oregon and California would be fully powered by renewable energy. Its Maiden, NC facility includes two 20-MW solar PV installations, with its remaining power to derived from a 10-MW biogas plant, fuel cells and renewable power purchased from local and regional sources — which are all set to be up and running by the end of 2013. It is locally sourcing wind power for its Newark, Calif. center and will do the same with a mix of renewable sources at its Prineville, Ore. center. Its next data center in Reno, Nevada will be powered by onsite geothermal and solar sources.

Apple is standing by its commitment to be powered entirely by renewables company-wide. According to its Environmental Footprint Report, “The implementation of our energy strategy results in an energy supply mix unique to each location. In all cases, though, Apple’s goal is to meet our energy needs with 100 percent clean, renewable energy that reduces GHG emissions and other environmental impacts.”

Greenpeace acknowledged Apple’s swift turnaround in a statement: "Apple's announcement shows that it has made real progress in its commitment to lead the way to a clean energy future. Apple's increased level of disclosure about its energy sources helps customers know that their iCloud will be powered by clean energy sources, not coal."

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

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

March 26, 2013

Is Suzlon's $650m Wind Bond the First of Many?

India had been trying to get a corporate bond market going for 15 years – search “growing India corporate bonds” and you’ll find papers on the subject from the Reserve Bank of India, Bank of International Settlement and others scattered over past years.

The latest Indian 5 year plan has this as a priority – and has green finance as a priority in a separate section.

India has a particular need: a miniscule local corporate bond market means restricted financing options for business, including for renewable and energy efficient building developers – diversity with financing options helps drive down costs of finance.

India also needs suitable instruments – e.g. corporate bonds – to attract some of the vast amount of capital currently going into buying gold and inflating the property market – a misallocation of domestic savings if ever there was one.

Corporate bond markets need help from governments to get started. Among other things, they usually need a stimulatory dose of government guarantees and credit enhancements to kickstart the market. (We think there’s room to grow an equivalent asset-backed securities market as well, but more on that another time).

That’s why this bond issued by Suzlon Energy Limited (Bombay: SUZLON) is so exciting! The US dollar denominated. 5 year bond carries a 4.97% coupon, and was provisionally rated, Baa2 by Moody's.

One swallow does not a summer make, but it’s a great precedent. India’s 5 year plan should support much more of this, by simply bringing together the corporate bonds and green finance strands.

The Suzlon bond is backed by a Stand-By Letter of Credit (SBLC) from the State Bank of India. The bonds will be listed on the Singapore stock exchange (SGX). Suzlon says it’s the first ever USD credit enhanced bond from India.

Suzlon is a “pure-play” wind energy company; we see their corporate bonds as fully-blown climate bonds.

BTW, where companies only have part of their business in qualifying sectors, we encourage them to issue corporate “asset-linked” bonds, similar to the European Investment Bank’s Climate Awareness Bond, or last year’s Air Liquide Health Bond. If the relevant assets were verified as qualifying (like wind farms) and there was accountability around use of proceeds, credit enhancements should be available. Oh, and the Climate Bonds Standard provides a means to verify with confidence.

Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

March 25, 2013

Betting on Alternative Fueling at Clean Energy Fuels

by Debra Fiakas CFA


Clean Energy Fuels
(CLNE:  Nasdaq) is building a nationwide network of natural gas stations for fleet vehicles.  The company supplies compressed natural gas (CNG) fuel for light, medium, and heavy-duty vehicles; and liquefied natural gas (LNG) fuel for medium and heavy-duty vehicles.  While there is a growing number of fleet owners that have invested in natural gas vehicles, Clean Energy has yet to reach the critical mass needed to reach profitability.  The company claimed 650 fleet owners as customers with over 30,000 vehicles in operation.

Clean Energy reported $334 million in total sales in the year 2012, compared to $292.7 million the prior year.  The represents 14.1% year-over-year growth, which is not a bad showing given the state of the U.S. economy.  Unfortunately, the net loss widened in 2012.   First of all, the profit margin slipped to 24% and higher general and administrative expenses served as an additional drag.

What has really been a problem for Clean Energy Fuels is the slow pace of natural gas vehicles by fleet owners.  Engines burning natural gas cost substantially more than gas or diesel engines.  Even with the lower cost of natural gas, truck owners claim the return on investment is too long.

Earlier this week Clean Energy and its partner Westport Innovations (WPRT:  Nasdaq) announced a new program to encourage natural gas vehicle purchases.  The two companies have agreed to bundle the Westport Liquified Natural Gas System and a Clean Energy long-term fuel contract.  The package of rebates and discounts should deliver the kind of savings that will accelerate return on investment for truck owners.

If the program is successful in winning converts to natural gas, Clean Energy will open additional natural gas distribution points.  Indicated demand of 30,000 gallons or more is necessary to support regional fueling stations.  Clean Energy has 60 new stations planned for the expansion that will be added to the 348 natural gas fueling stations it had in operation at the end of 2012.

CLNE has been trading in a range the last few months, held back by a solid line of resistance at the $14.50 price level.  Fortunately, there appears to be a strong level of support near $12.00 per share.  If the sales and marketing program with Westport draws new customers at a faster pace, CLNE will certainly look more attractive despite the recent losses.  Recent trading sessions suggest that is an element of upward momentum in the stock that could propel the price to the $18.50 level.  Management’s report on the first quarter 2013 will certainly included at some news on special offer and that could be enough to pierce the price ceiling near $14.50.

Photo: Clean Energy Fuels CNG Fueling Station with CNG buses via Wikimedia Commons by Jennagraber.

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. 

March 24, 2013

JA Solar and Renesola Rush to Reassure Creditors

Doug Young

Mid-sized solar panel makers JA Solar (Nasdaq: JASO) and ReneSola (NYSE: SOL) are both in the news today discussing their finances, in what looks like an attempt to calm the nerves of investors and creditors who are no doubt worried following the bankruptcy forced upon former industry leader Suntech (NYSE: STP) earlier this week. All of these companies have billions of dollars in debt which they used to build up their manufacturing operations over the last decade, and big amounts of that money will be due for repayment in the next 2 years.

Meantime, the fate of Suntech itself remains cloudy because the process is happening in an Chinese courtroom where local government officials wield big influence; but Chinese media are giving some indication of how things might proceed, with the government in the company's hometown of Wuxi looking like it will play a major role in the coming reorganization.

Let's start off with the news from JA Solar and ReneSola, which, like everyone else, are both losing money and struggling under big piles of debt accumulated during China's solar panel build-up. Chinese media are quoting a JA Solar official saying the company has already prepared sufficient funds to repay $120 million worth of its bonds that will come due in May.

The reports cite CEO Xie Jian saying the company's bonds "don't have default risks", although those words didn't stop the price of the company's bonds from falling. Its publicly traded shares also fell 3.5 percent in New York, and are down 9 percent this week.

Meantime, ReneSola has put out its own statement announcing a new credit line from policy lender China Development Bank worth 320 million yuan, or about $51 million. (company announcement) The announcement doesn't say much, though the company says its ability to secure new funds in such a tough environment underscores ReneSola's relatively strong financial position.

I don't want to be too cynical, but it does seem like someone needs to point out that China Development Bank is hardly a traditional commercial bank, and I seriously doubt ReneSola could have gotten similar funds from any real commercial lender. People who have followed the current crisis will know that China Development Bank has been mentioned on numerous occasions as Beijing's most likely financial vehicle for a broader industry bailout that could come later this year. This latest news would seem to indicate the bank will help Chinese solar panel makers to keep operating by providing necessary funds until the broader restructuring plan is implemented.

Lastly, let's take a look at the latest report on Suntech in the China Daily, whose headline on the saga cites analysts saying the decision to declare bankruptcy was a "wise move". Since the China Daily is an unofficial spokespaper of Beijing, it's probably safe to assume that government officials in both Beijing and Wuxi agree with this characterization of the bankruptcy declaration, which was forced on Suntech by its creditor banks.

The report, which largely cites unnamed industry insiders, says there is a good possibility that the Wuxi government will take over Suntech's debt, which includes more than $1 billion owed to 9 Chinese commercial banks. The report also indicates that newly named Suntech director Zhou Weiping, who has strong ties to the financial industry, may play an important role in the reorganization. It indicates that Suntech founder Shi Zhengrong may assist in the coming reorganization, but is unlikely to stay around after that. All of these moves look designed to calm investor worries as government entities keep the sector alive until a broader industry reorganization plan is announced.

Bottom line: New comments from JA Solar and ReneSola are aimed at easing default concerns among their creditors, with Beijing likely to continue funding the sector before a broader reorganization.

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.

March 23, 2013

Maxwell's Misreported Revenue: More to Come

Tom Konrad CFA


On March 7th, Maxwell Technologies (NASD:MXWL) announced problems with revenue timing.  Unlike Lime Energy (NASD:LIME), which I discussed in the previous part of this series, there was no hint of any fictitious revenue.  The disclosure was very specific that “The errors relate to the timing of recognition of revenue from sales to certain distributors.”  The announcement went on to discuss “arrangements … regarding the payment terms for sales” at these distributors.  As a result of the discovery, “certain employees were terminated and our Sr. Vice President of Sales and Marketing resigned.”  Maxwell is reviewing deficiencies in its internal controls.

What it Means

Too-early revenue recognition is one of the most common accounting problems, and often results when managers push employees  to help them hit too-aggressive growth targets.  This makes sense given Maxwell’s recent series of earnings disappointments and reduced growth estimates.   While the terminated employees were most likely the ones who did the book-fiddling, and the Senior VP who resigned gave them the incentives to fiddle, senior management and the board still bear the responsibility for the Senior VP’s incentives, and for failing to catch the problems sooner.

While the announced plans to improve internal controls are absolutely necessary, the company should also re-examine its culture.  Not only should controls make it harder to cheat, but employees and executives should not be rewarded for their numbers, but also for coming by those numbers honestly.

More to Come?

Like analysts at Piper Jaffray, I expect MXWL will remain under pressure until its revised financial statements are released.  I initially also agreed with them that the stock would recover when the filings are made.  

Now I’m not so sure.

I recently began co-managing a green stock focused hedge fund with Jan Schalkwijk, CFA.  In November, when we were discussing Maxwell for possible inclusion in the fund, Jan brought the rapid growth of Maxwell’s accounts receivable.

Although there can be many other causes, improperly recognized revenue usually shows up in growth of accounts receivable (AR).  AR is supposed to be money owed to the company by its customers.  If product has been shipped to a distributor, but payment need not be made until it is sold, then that product should still be considered inventory, not booked as revenue and moved to AR.  Yet this is what seems to have happened at Maxwell.

Between Q3 2011 and Q3 2012, Maxwell’s net accounts receivable grew by $21 million to $53 million.  When Jan brought this to my attention,  I asked Maxwell’s CEO, David Schramm about it by email.  He replied:

I would say there are two factors for the increase in accounts receivable.  First, our sales have been increasing and that naturally drives the receivables balances higher.  The second reason is that a number of customers have been paying slowly.  While it is not unusual to have one customer pay slowly, it is not normal for us to have more than one customer pay late.  In our current case, there are three customers who are paying slower than normal.  We have evaluated these customers and their ability to pay and believe the accounts are fully collectible.

Jan and I were not entirely comfortable that this completely accounted for rapid growth of AR (revenues only grew 10% over the same period.)   Nevertheless, we found Schramm’s statement sufficiently believable to treat the growth of AR as something to watch, not something which would make us sell the stock (then trading below $7.)  We planned to re-assess our decision this quarter, if AR did not begin to reverse course.  We also took comfort in the aggressive buying of MXWL by insiders.  They would not have been buying had they suspected Maxwell’s results were the result of improper revenue recognition.

In hindsight, I suspect the “slow payment” by customers may have been part of how the employees responsible were hiding the early revenue recognition.

We now know the accounts receivable growth was a red flag.    The 10% increase in revenue would most likely be matched by a 10% increase in AR, so revenue growth accounts for only $2 to $3 million of the $21 million increase in AR.  Another $12 million is the misreported revenue that was announced on Thursday.   That leaves a gap of $6 million or so to be accounted for by customers who have recently begun paying more slowly.

To put the AR increase in perspective, I decided to chart Maxwell’s quarterly revenue and AR  going back to the end of 2007.  Perhaps customers had been paying unusually quickly in 2011, as opposed to slowly in 2012.

In order to remove any seasonal effects, I used numbers from the third quarter (Q3) of each year.  I then adjusted these numbers as best I could to account for the changes resulting from the mis-reported revenue contained in the March 7th press release.

Both the as-reported and adjusted numbers are shown in the graph below.

MXWL AR and Revs.png

 The graph also shows days to pay, which is the number of days it would take to generate each quarter’s accounts receivable given the current revenue.   If AR had been growing only in proportion with revenue, days to pay should have remained roughly constant.

As you can see, it took 57 days to collect payment from the average customer in Q3 2008, but it took 110 days in Q3 2012.  Even after we account for the misreported revenue announced on March 7th, adjusted Q3 2012 days to pay remained at 89.  If the adjusted numbers are to believed, Maxwell’s average customer was  taking between 70 to 80 days to pay in the four years to 2011, but was taking almost 90 days to pay in 2012.

It seems quite possible to me that behind the growing Accounts Receivable lies yet more mis-reported revenue.  We know that some customers  had payment terms which “had not been communicated to Maxwell’s finance and accounting department and, therefore, had not been considered when recording revenue on shipments to these distributors.”  Is it unreasonable to assume that there are other customers who seem to be paying slowly also have lenient payment terms of which Maxwell’s accounting department is not yet aware?

If we were to assume that all the misreported revenue had already been found, we would have to come up with some other explanation as to why Maxwell’s customers have been paying more slowly in 2012 than they have in the past.  Sometimes the simplest explanation is the right one.


While we will only know the truth when Maxwell files its results, it seems likely to me that the company developed a culture which pushed hitting the numbers even if they had to be fudged.

After accounting for the fudging revealed so far, the recent growth in Accounts Receivable cannot be explained solely by revenue growth over the same period and by the misreported revenue already announced.  While it is possible that Maxwell’s customers have been paying more slowly in 2012 than in previous years for their own reasons, it is also possible that there is more aggressive accounting yet to be revealed.

With this in mind, I have sold my holdings of Maxwell at a small loss.  I may choose to buy the stock back if the price falls enough to account for the revelations I fear may be yet to come.

UPDATE: On March 19th, Maxwell's independent accounting firm McGladrey LLP resigned.  McGladrey stated that it "could no longer rely on management's representations," and that "there are material weaknesses in [Maxwell's] internal control over revenue recognition and potentially, more broadly, in [its] overall control environment."   While this statement adds credence to my suspicion that there could be more misreprted revenue than initially disclosed, it also reflect badly on McGladrey.  Its independent accountants are supposed to provide assurance as to the quality of Maxwell's internal controls.  McGladrey completely failed to detect these weaknesses until after the damage had been done.

Disclosure: Long LIME

This article was first published on the author's Forbes.com blog, Green Stocks on March 12th.

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.

March 22, 2013

Misreported Revenue, Part I: Lime Energy

Tom Konrad CFA

Lime logo

In my model portfolios of ten clean energy stocks for 2013 andsix alternatives, three companies are currently delaying earnings announcements for various reasons, and at least two of the three will be restating previous results.

Many investors flee the scene at the first whiff of accounting problems: All investors rely on a company’s financial statements (directly or indirectly) to value companies.  If there is  any doubt as to the accuracy of those statements, they believe it’s better to invest elsewhere.

In contrast, I believe that we never have anything like an accurate picture of what is going on at the companies we own.  Uncertainty is always present, how much is just a matter of degree.  Even accurate financial statements are the shadows dancing on a cave wall in Plato’s cave.     Knowing I’m always operating in a climate of investment uncertainty, I’m willing to consider investing in a company with questionable accounts if the uncertainty seems limited and is more than compensated for by a low stock price.

As always in investing, the question should be, “Do you think reality is better or worse than the what the vast majority of investors assume?”  If reality is worse than it appears, you should sell.  If it’s better, you should buy or hold.  Earnings restatements can be just the tip of an iceberg of accounting troubles, or they be the rough that hides a diamond.

Below, I take a look at what’s going on at Lime Energy (NASD:LIME).

I initially intended to deal with  Maxwell Technologies (NASD:MXWL), and Ameresco, Inc. (NYSE:AMRC)  in this article as well, but the article kept growing longer.  I’ve split it up in order to publish each part as I finish it.  Here are the links to the parts about Maxwell and Ameresco.

Lime Energy (NASD:LIME)

At the start of the year when I included Lime in my list, its accounting problems were well known and ongoing.  They started with the announcement last July that the company would be delaying its second quarterly report, and that annual reports for 2010 and 2011 would have to be restated because of problems with revenue recognition.  Most worryingly, the company stated that “non-existent revenue may have been recorded.”

Timing of revenue recognition can be very subjective, and honest accountants can differ about when money flowing in to the company should be booked as sales.  However, booking non-existent revenue means that someone was attempting to present a false picture of how much money was actually flowing in.  This is not a judgement call, it’s called lying.  In that case, the only question is, “Who was lying, and who knew about it?”

As such, Lime’s are the most serious sort of accounting problem.  Most investors would sell at any price to avoid a company that had been creating sales out of thin air.  The reasons I remained invested in the company were:

  1. Large share purchases by company insiders led me to believe that upper levels of management were unaware of the chicanery.  While it was bad that their accounting controls were not sufficient to catch the problem sooner, it did not have the feel of a little Enron.
  2. The audit committee went out on a limb by stating that the believed the magnitude of the mis-reported revenue was limited to less than $15 million.
  3. The price of the stock had fallen far enough that I felt it more than accounted for $15 million of non-existent revenue.

Unfortunately, the accounting problems were much worse (at least in complexity, and possibly in magnitude) than the board initially thought.   After repeated delays in filing the corrected statements, Lime announced in December that it was broadening the  potential of restatement to include its 2009 financial statements.  Also in that announcement, they did not make any claims as to the magnitude of the potential restatements.  I take this to imply that the total size of the mis-stated or fictitious revenue may exceed $15 million.

On the encouraging side, the late expansion of the investigation lends credibility to the assumption that top management was not aware of the problems.  Also, Lime’s largest shareholder and board chairman continued to put money into the company  at prices well above the $0.56 it was trading for at the end of 2013, which is why I included it in my clean energy stock picks this year.

For now, the only information we have are announcements about  company’s continued efficiency programs run for its utility customers, and the sale of a non-core business unit.  Both of these are encouraging signs, but the only things we know for certain at this point are that the company’s books were a total mess, and Lime can be now bought for a fraction of what (supposedly informed) insiders were willing to pay a year ago.


Had I known Lime’s problems would be this bad last July, I too would have sold immediately.  Now, however, I have trouble seeing how the news could get much worse.  I believe the many delays have led the vast majority of investors to completely give up on this stock.  I consider it a gamble, but one where the odds are on my side.

For now, I’m waiting for the earnings restatements to remove the clouds of uncertainty hanging over Lime.

Disclosure: Long LIME, AMRC

This article was first published on the author's Forbes.com blog, Green Stocks on March 12th.

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.

March 21, 2013

Suntech Forced into Bankruptcy, Yingli Partners with GCL

Doug Young

Suntech logo]The inevitable has finally happened at tanking former solar star Suntech (NYSE: STP), which has been forced into bankruptcy ending a months-long battle between the company's founder Shi Zhengrong and just about all the company's other stakeholders. In the meantime, I would be remiss not to mention another solar news tidbit that has panel maker Yingli (NYSE: YGE) forming a new strategic tie-up with GLC-Poly Energy (HKEx: 3800), in what could eventually become the first mega-merger in the struggling solar panel sector.

Let's start with Suntech, which has been in the headlines nearly non-stop these last 2 weeks as it formally defaulted on more than $500 million in bonds that came due last Friday. Suntech founder Shi Zhengrong has been fighting nonstop not only with the bondholders, but also with his company's bankers and officials in the city of Wuxi where Suntech is based.

Nearly everyone wants Shi to leave the company as part of any rescue plan, and the company's various stakeholders have partly succeeded in that goal by first stripping Shi of his CEO title, and then his chairman's title as well. But Shi remained in the picture because of his holdings of 60 percent of Suntech.

Now the government and Suntech's state-owned lenders have finally joined forces and petitioned a local court in Wuxi to have Suntech declared insolvent, according to a company announcement. (company announcement) Chinese media reported that the court accepted the petition on Wednesday, and ordered that the company undergo a bankruptcy organization.

That should theoretically set the stage for the cancellation of Suntech's US-traded stock, which would eliminate Shi's last remaining influence at the company. Such a share cancellation would mark the end of a spectacular downfall for Shi, who was once China's richest man with a fortune worth more than $2 billion.

Interestingly, Suntech's shares were unchanged in Wednesday trade after all the latest news. But at 59 cents each, they are already at a tiny fraction of their all-time high of around $80 reached back in 2008. Some shareholders may think that Suntech stock will retain some value under the reorganization, as China may want to keep the company publicly traded. But that may be a dangerous gamble since such a move would leave Shi with some influence at the company. Accordingly, I would put the chances of Suntech's stock becoming worthless at greater than 50 percent.

Meantime, let's look quickly at Yingli's new tie-up with GCL-Poly. (company announcement) There's not much detail in the announcement, which looks like a good fit since Yingli is a leading solar panel maker and GCL-Poly is a top supplier of material used to make those solar panels. Both companies are also among the largest in their respective spaces, though GCL-Poly's market cap is quite a bit bigger than Yingli. If this partnership goes smoothly, I could see the 2 companies eventually combining, producing a new leading player for this beleaguered sector that is in desperate need of more consolidation.

Bottom line: Suntech's upcoming bankruptcy reorganization is likely to result in the cancellation of its stock, wiping out founder Shi Zhengrong's fortune and removing him from the company.

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.

Your Portfolio is Hooked on Fossil Fuels

Garvin Jabusch

Oil addiction photo via BigStock

You are drilling for oil and natural gas, and you probably don’t even know it.  What, you say you’ve never been near a drilling rig, and aren’t even sure what one looks like?  You’re still drilling, because companies you own are drilling.

Many financial advisors and asset managers routinely assume that broadly diversified stock portfolios will have holdings in fossil fuels companies.  Even most stock mutual funds that identify themselves as ‘green’ funds contain natural gas and even oil holdings.

This is not only morally questionable, it’s also likely to lead to disappointing returns.  If the goal of investing is to grow assets, accrue wealth, and prepare for our futures, then it’s key to invest in companies, industries and sectors that will still be there and growing in that future. Similarly, our collective macroeconomic goals shouldn’t be to keep the economy ticking along for the next quarter or current political term, but to keep it healthy so we may thrive for decades if not centuries. Fossil fuels companies fail on both these fronts: they face an uphill battle trying to grow into the medium and long term, and, for many reasons, they also hinder our chances of achieving economy-wide long-term economic growth, which limits your and my chances of positive portfolio returns.

We at Green Alpha believe that fossil fuels have no place in portfolios designed to capitalize on the emerging, sustainable, green, thriving next economy. We picture and model, rather, a next economy comprised of enterprises whose technologies, material inputs, and/or practices have not proven deleterious to the environmental underpinnings of the global economy; and, equally important, those whose businesses have a better than average probability of keeping economic production running close to capacity (meaning close to full employment and therefore causing sufficient economic demand to keep economies healthy). Healthy, innovative economies made up of healthy companies have always proven better for portfolio performance. Next economy companies are innovation leaders in all areas, not just in the energy industries; they exist now and will continue to emerge in all economic sectors, providing all products, goods and services required to have a fully functioning, even thriving global economy. And we believe that next economy companies will continue to win market share from legacy firms, and that they therefore provide superior odds of delivering long term competitive returns.

There are several key reasons this should be the case. As a global economy, we can no longer afford to wait for our basic economic underpinnings to break before we fix them. Too many issues, economy wide, from agriculture to water to warming, all damaged by fossil fuels, have been ignored and left to degrade. By now it’s clear that fossil fuels, including natural gas, do not result in us growing a thriving next economy. Between greenhouse gas emissions, toxic emissions (such as mercury), accidents, spills and contamination of soil, groundwater and oceans, to say they have proven deleterious to our environmental-macroeconomic underpinnings is an understatement. We need to make sure the earth’s basic systems - which global economies rely upon - keep on functioning. And the time to do that is now, while they’re still working.

Fortunately, as a global economy we are now (for the first time since the beginning of the industrial revolution) in a position to begin transitioning to methods that will allow us to run sustainably using advancements like far cheaper and more beneficial sources of energy. As inexpensive, unlimited renewables gain more market share, fossil fuels by definition will be losing market share, meaning stocks of companies providing the most economically competitive renewables will be in a better position to deliver superior stock performance than will oil, coal or even natural gas. Indeed, Shell Oil has recently projected that renewables will eclipse oil as society’s primary source of energy, making up as much as 40% of all energy used within the next 47 years. Considering the booming growth of renewables in recent years (particularly solar), I wouldn’t be surprised if this occurs much sooner; but in any case the writing is now officially on the wall. Fossil fuels have already begun to lose market share to renewables. In 2012, most new electricity generating capacity brought online in the United States was from renewables, and in January 2013, all new U.S. electrical generating capacity was provided by renewables. If these trends are even close to future outcomes, Shell’s prediction will have proven far too optimistic for the future of oil.

Further, from a stock valuation point of view it has also become clear that shares of fossil fuels companies have become far more risky as an asset class than they were even a few years ago. Most policy observers believe that within a few years there will be a worldwide price on carbon via some combination of carbon taxes, cap-and-trade schemes and/or requirements to sequester carbon via ‘capture and storage’ technologies. When these emerge in large ways, they will represent new systemic costs of business for fossil fuels companies that will potentially badly damage their margins. In addition, in a potentially more financially perilous risk, there is the ongoing specter incredibly expensive damage from accidents associated with fossil fuels. For example, look at BP’s management’s and shareholders’ objections to settlements and potential further judicially mandated costs and penalties relating to the 2010 Deepwater Horizon spill (above and beyond the $20 billion trust already established by BP). BP's tortured arguments and huge efforts to avoid further financial liability for an accident for which they clearly are partially responsible reveals the devastating risks the oil industry will be facing as it reaches ever further for product. BP’s continuing potential liabilities from this one incident, including “uncapped class-action settlements with private plaintiffs” and “civil charges brought by the Justice Department” and “a gross negligence finding [that] could nearly quadruple the civil damages owed by BP under the Clean Water Act to $21 billion” among others, show, more than anything, that oil as an asset class is becoming a subprime investment.

All this being the case, why are fossil fuels companies’ stocks considered mandatory holdings by many professional money managers and investment banks? The primary answer is ‘modern portfolio theory;’ that body of knowledge regarding how to build diversified portfolios of stocks taught at MBA and finance departments all over the world and considered sacrosanct by most practitioners. There are good reasons modern portfolio theory (MPT) is so widely practiced, mainly that its underlying goal, to maximize return for a given level of financial risk, is any portfolio manager’s ultimate duty. MPT asserts that the way to achieve this is to have appropriate portfolio exposure to various asset classes like cash, bonds, stocks, commodities, and from there to follow the proscribed allocation to specific sectors and industries within these groups in order to achieve the most “efficient frontier” mix of securities. The sectors proscribed by modern portfolio theory, as it is typically practiced, include fossil fuels such as oil and gas. But let’s recall that this theory was pioneered in the 1930s, and was considered more or less perfected by Harry Markowitz in the 1950s, culminating in his 1959 book “PORTFOLIO SELECTION EFFICIENT DIVERSIFICATION OF INVESTMENTS.” For Markowitz and his predecessors, fossil fuels were the only visible source of energy sufficient to power society, and by requiring portfolio allocations to these industries, they were effectively making sure investors got in on the profitable business of what was really the only energy available. Modern portfolio theory’s asset allocation models were made for and reflect a world where fossil fuels were the only imaginable primary power source. Moreover, in the 1950s, there were fewer material resource constraints, a far lower global population, the word ‘scarcity’ did not apply to the natural world, and no one had heard of climate change or global warming, so there really were no reasons to think twice about fossil fuels or to imagine reasons their returns could be at risk. But we don’t live in that world anymore.

Building a Fossil Fuels Free Portfolio

Next economy portfolio theory differs from MPT by recognizing that we live in an economy that no longer resembles the world of the 1950s. Where modern portfolio theory defines risk as financial risk only, next economy theory is also concerned with the risks of earth’s support systems failing. Where modern portfolio theory says to invest in oil and coal, then, next economy theory says to look for primary energy replacements that have not proven damaging to the environment to a degree where they disrupt economics and even society.

And in realizing that energy now means far more than it did in Markowitz’s day, and by observing that many if not all economic sectors from transportation to agriculture could be run in a sustainable fashion, largely using current technologies and approaches, we build portfolios comprised of next economy companies. This in turn helps the green economy to continue to accelerate, and provides clients with opportunity for competitive returns.  Investing in the growing technologies of the future just makes better common sense than investing in the riskier, slowly shrinking technologies of the past.

Where modern portfolio theory says, ‘buy all these 1950s economic sectors,’ next economy theory says ‘look for all the ways there are to keep the economy going such that we, as a global economy, can thrive indefinitely.’ In that sense, we argue that current portfolio theory is upside down. So-called “Modern” Portfolio Theory is backward looking, but wise investors look forward.  We must think very carefully about asset allocation in the modern economy, and start to make changes. Traditional asset classes must evolve (“critical power sources” rather than “oil and gas”, for example), and our portfolios must reflect that and begin to invest in fully functional enterprises that are both environmentally and economically sustainable far farther into our future than current MPT could foresee. But if MPT is all we know, how do we accomplish that? The only answer to that can be that we have to develop new processes. Green Alpha’s attempt at that, in some ways representing a reversal of traditional models of asset management, works like this:

  1. Begin at the highest macroeconomic and ecological levels and make an objective assessment regarding the most pressing issues confronting world economies
  2. Having identified key issues, the next step is to rigorously research scientific consensus and new approaches to the technologies, ideas and business practices best positioned to and most likely to successfully drive growth while aiding in mitigation of and/or adaptation of issues (such as climate change and resource scarcity)
  3. Of these approaches, then, we ask in the third step which can practically be deployed or practiced – that is, used in the real world
  4. Then, of these working, functional, practical approaches, we fourth ask which can also be aligned with economic interests such that they can attract market capital and inspire both entrepreneurs and established companies to engage. In other words, which can be deployed as profitable businesses
  5. Only now, at this point, do we in our fifth step identify specific companies that come as close as possible to meeting these criteria
  6. Looking at granular company-level financial data comes last for us, and is only applied to qualified next economy companies, as identified via the five-stage methodology above. In the final step then, we apply quantitative, rigorous, bottom-up financial analysis to identify stocks of next economy companies that offer the best financial positions with minimized risk, with particular focus on growth potential and market liquidity and bankruptcy risks.

The tools applied in the final step are universally known and practiced and do not bear describing here. And in any case this is not the piece of portfolio management we're redefining. Suffice it to say that from a bottom up fundamental quant perspective, we don't believe one can improve much Graham-Dodd valuation methodology.

Practicing this methodology, we arrive at innovative, fully diversified portfolios comprised of firms that are working now and are positioned to keep working far into the future as the next economy emerges to displace the fossil fuels economy.

As businesses advance the better, cheaper, more efficient technologies that do not result in further warming, increased resource scarcity, deadly pollution, and soil and groundwater contamination, we can only imagine the productivity, lifestyle and well-being surges that will be unleashed. So enough with traditional, oil based economic models. 

We live in a new world, and it’s time we acted like it.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha ® Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, "Green Alpha's Next Economy."

March 20, 2013

A 10-Minute Guide to Obama’s New Energy Policy

Jim Lane
Stopwatch photo via BigStock

A major push from Obama on energy.
From DOE: “Liquid fuels demand can be sufficiently reduced so that biomass can meet all liquid fuel needs.”
What’s up? What is an Energy Security Trust, anyway? The Digest’s 10-Minute Guide tells all.

In an address at the Argonne National Laboratories on Friday, President Obama said:
“You see, after years of talking about it, we’re finally poised to take control of our energy future.  We produce more oil than we have in 15 years.  We import less oil than we have in 20 years…But the only way we’re going to break this cycle of spiking gas prices for good is to shift our cars and trucks off of oil for good.  That’s why, in my State of the Union Address, I called on Congress to set up an Energy Security Trust to fund research into new technologies that will hobama-argonne[1].jpgelp us reach that goal.

“I’m proposing that we take some of our oil and gas revenues from public lands and put it towards research that will benefit the public, so that we can support American ingenuity without adding a dime to our deficit…devising new ways to fuel our cars and trucks with new sources of clean energy – like advanced biofuels and natural gas – so drivers can one day go coast-to-coast without using a drop of oil.

“And in the meantime, let’s keep moving forward on an all-of-the-above energy strategy.  A strategy where we produce more oil and gas here at home, but also more biofuels and fuel-efficient vehicles; more solar power and wind power. We can do this.”
A companion study released the the Department of Energy was, in its way, more ambitious and more specific: “TEF does not project that all liquid fuels will be eliminated from the future transportation sector, but rather that demand can be sufficiently reduced so that biomass can meet all liquid fuel needs.”

The Energy Security Trust. Is it a new idea?

No. In his 2013 State of the Union address, President Obama called on Congress to create an Energy Security Trust Fund, which would free American families and business from painful spikes in gas prices. The President’s plan builds on an idea that has bipartisan support from experts including retired admirals and generals and leading CEOs, and it focuses on one goal: shifting America’s cars and trucks off oil entirely.

How does it work?

Over 10 years, the Energy Security Trust will provide $2 billion for critical, cutting-edge research focused on developing cost-effective transportation alternatives. The investments will support research into a range of technologies – things like advanced vehicles that run on electricity, homegrown biofuels, and domestically produced natural gas. It will also help fund a small number of real-world experiments that try different transportation techniques in cities and towns around the country using advanced vehicles at scale.

Does it involve new taxes?

No. The funding will be provided by revenues from federal oil and gas development, and will not add any additional costs to the federal budget.

President Obama’s complete remarks are where?

They’re here.

Does the White House’s have a short take on the Energy Security Trust?

Yep. Here you are.

What is the Transport Energy Futures (TEF) study?

It’s a new study from the U.S. Department of Energy, the National Renewable Energy Laboratory, and Argonne National Laboratory that finds the United States has the potential to reduce petroleum use and greenhouse gas (GHG) emissions in the transportation sector by more than 80% by 2050 – and proposes pathways towards that goal.

What is the strategy?

• Stopping Growth in Transportation Sector Energy Use
• Using More Biofuels
• Expanding Electric and Hydrogen Technologies

What’s the overall 15-point Obama Energy Strategy, again?

1. Challenges Americans to double renewable electricity generation again by 2020.
2. Directs the Interior Department to make energy project permitting more robust.
3. Commits to safer production and cleaner electricity from natural gas.
4. Supports a responsible nuclear waste strategy.
5. Sets a goal to cut net oil imports in half by the end of the decade.
6. Commits to partnering with the private sector to adopt natural gas and other alternative fuels in the Nation’s trucking fleet.
7. Establishes a new goal to double American energy productivity by 2030.
8. Challenges States to Cut Energy Waste and Support Energy Efficiency and Modernize the Grid.
9. Commits to build on the success of existing partnerships with the public and private sector to use energy wisely.
10. Calls for sustained investments in technologies that promote maximum productivity of energy use and reduce waste.
11. Leads efforts through the Clean Energy Ministerial and other fora to promote energy efficiency and the development and deployment of clean energy.
12. Works through the G20 and other fora toward the global phase out of inefficient fossil fuel subsidies.
13. Promotes safe and responsible oil and natural gas development.
14. Updates our international capabilities to strengthen energy security.
15. Supports American nuclear exports.

Where’s the Fact Sheet on that?

Right here.

Why the transport sector, specifically?

The transportation sector accounts for 71% of total U.S. petroleum consumption and 33% of U.S. total carbon emissions.

What are the 9 Interconnected reports that make up the overall TEF study?

1. Deployment pathways issues including the development of, transition to, and challenges of advanced technology
2. Non-cost barriers to advanced vehicles such as range anxiety, refueling availability, technology reliability, and consumer familiarity.
3. Opportunities to improve non-light-duty vehicle efficiency for medium- and heavy-duty trucks, off-road vehicles and equipment, aircraft, marine vessels, and railways
4. Opportunities for switching modes of transporting freight, such as moving freight from trucks to rail and ships.
5. Infrastructure expansion required for deployment of low-GHG fuels, including electricity, biofuels, hydrogen, and natural gas
6. Balance of biomass resource demand and supply, including allocations for various transportation fuels, electric generation, and other applications.
7. Opportunities to save energy and abate GHG emissions through community development and built environment strategies
8. Trip reduction through mass transit, tele-working, tele-shopping, carpooling, and improvement of vehicle performance through efficient driving
9. Freight demand patterns, including trends in operational needs and projections of future use levels.


How much biofuels use does the TEF study anticipate?

Up to 100 percent of fuel needs, if the US hits its 2050 fuel efficiency, hydrogen fuel, and electrification goals as well. Even at the EIA baseline projected fuel demand in 2050, biofuels could supply as much as 50 percent of the jet fuel market, and 30 percent of the gasoline and diesel markets if EERE biofuel technology goals are met. Getting to the point where biomass could provide 100 percent of vehicle liquid fuels requires reducing the need for fuel through the efficiency and demand management measures described above, including deployment of electricity or hydrogen fuel alternatives.

Will this require an avalanche of infrastructure?

Some. “While new fuel types require new infrastructure, the share of infrastructure cost within total fuel costs is very small (1.5-3 percent), and these costs can be made up for in fuel cost savings of more efficient advanced vehicles.”

Where can I start to dig deeper into the overall plan and the TEF study?

You can start here at the TEF home page.

Who was responsible for TEF?

TEF is a collaboration between EERE, the National Renewable Energy Laboratory (NREL), and Argonne National Laboratory (ANL). The project benefitted from the input provided by a steering committee that included some of the nation’s foremost experts on transportation energy from the Environmental Protection Agency (EPA), the U.S. Department of Transportation (DOT), academic researchers, and industry associations.

What is NEPA and what is happening there?

NEPA is the National Environmental Policy Act of 1970, a product of the Nixon Administration.

Er, Nixon? What’s new there?

The President’s strategy includes requiring federal agencies, under NEPA’s authority, to include climate change impact in reviewing proposed projects. For example — leases to drill for coal, or export coal to China, or construct oil pipelines like the Keystone XL pipeline, could be reviewed not only for air pollution and water fouling, but for overall greenhouse gas impact.

Are the changes in NEPA reviews ho-hum, or a big deal?

Big deal. Brendan Cummings, senior counsel for the Center for Biological Diversity told Bloomberg that the result will be “a major shakeup in how agencies conduct NEPA” reviews.

Does the President have this authority under NEPA?

Generally, yes. NEPA grants a right of Federal review of proposed projects for environmental impact — and climate change certainly falls broadly within that category. The devil is going to be in the details — after all, how much specific contribution to a problem like climate change be attributed to a single project?

Is a NEPA review capable of derailing a project?

No. A NEPA review is, at the end of the day, aimed at producing a thorough vetting process, rather than a specific outcome. Projects go through NEPA reviews — there is a robust commentary opportunity — but regulators, in the end, make decisions on permits. NEPA does establish a forum for introducing or reviewing data that will be used in a regulator’s decision — or, in lawsuits that may be filed to reverse a ruling.

Overall, is there going to be opposition from the right on the Energy Security Trust?

Forbes’ Houston-based energy columnist Christopher Helman writes: “This is a terrible idea — and a backdoor to the imposition of a nationwide carbon tax — that congress should not allow to pass.

“There is absolutely no reason why we need a dedicated Energy Security Trust to fund the national labs, or to fund any kind of alternative energy research. If congress wants to fund research it can pass a bill to fund research…Isn’t congressional appropriation how the federal government is supposed to pay for such stuff?

“Then consider that the Department of Energy has in recent years built up an insanely terrible record of wasting taxpayer money by directing funds to private companies, many of which have simply gone belly up (but not before paying lavish bonuses to executives).

Why is there opposition from the left?

Here’s some flavor. “This approach will only encourage more dirty energy production…[and] doesn’t create any additional cost for using fossil fuels, thus creating no incentive for firms to divert resources into safer, cleaner and more renewable sources of energy,” Tyson Slocum, director of Public Citizen’s energy program, told bizjournals.com.

Disclosure: None.

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

March 19, 2013

Bejing Should Oust Shi to Save Suntech

Doug Young

Suntech logo]New developments have come rapidly over the past week at Suntech (NYSE: STP), leaving the former solar superstar on the brink of collapse as its founder Shi Zhengrong blocks a potential government rescue. Shi’s exit is believed to be a main condition for the government bailout, and his refusal to leave could well result in the failure of a company that is otherwise an industry leader with strong potential. To prevent such a collapse, the government should take the unusual step of forcing Shi to go so that Suntech can begin a desperately needed reorganization. Such interference should be used only rarely in a true market economy, but does make sense when it means saving important companies in crisis.

Suntech’s current woes are grounded in a 2-year-old crisis for solar panel makers, which are suffering from massive overcapacity due to a huge build-up over the last decade. Most companies are now deeply in the red, and their shares have also plummeted. Suntech’s shares have come under particular pressure and now trade at $0.70, a fraction of their nearly $50 price back in 2008.

Dr. Zhengrong Shi
Dr. Shi Zhengrong Suntech Founder, Chairman and CSO.
Photo credit: Suntech

But Suntech’s woes go beyond the industry’s general malaise. The company came under fire last year when it disclosed a relationship that allowed it to book millions of dollars in revenue by selling panels to a company that it controlled. That relationship sparked a confidence crisis as investors feared Suntech may have engaged in other dubious business practices.

The crisis came to a head last week when more than $500 million worth of Suntech debt matured even though the company lacked cash to repay the money. Some 60 percent of Suntech’s bondholders agreed to a two-month extension of the deadline, but at least one said it would sue, further compounding Suntech’s woes. (English article) Meanwhile, media reported that Suntech could declare bankruptcy by March 20. While all this was happening, Shi was removed from his posts as CEO and chairman of the company. But he retains a place on Suntech’s board and continues to control the company through his 60 percent ownership of its stock.

Government entities in Beijing and Suntech’s hometown of Wuxi are reportedly ready to provide desperately needed funds to ensure the company’s survival, as part of a broader State-led rescue that would see the industry consolidated around about a dozen its the biggest players. Suntech would almost certainly be among those consolidators if it can reorganize without Shi’s interference.

But Shi has shown he has no intention of leaving, even if that means driving Suntech to ruin. To prevent that, Beijing and Wuxi should force Shi from the company, using their clout with government agencies and Suntech’s State-owned lenders to apply pressure through actions like withholding funds and revoking business licenses.

This kind of interference is rare in the West, but has occurred in times like the global financial crisis when governments stepped in to save companies like General Motors (NYSE: GM) and RBS (London: RBS). Without such intervention, Suntech’s downward spiral could easily continue to the point where the company fails, resulting in the loss of a major player with the potential to reorganize and regain its place as a global leader.

Bottom line: The government should move more aggressively to push Shi Zhengrong out of Suntech, or risk seeing the company fail.

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

March 18, 2013

Zoltek Rebuffs Offers, But Quinn Isn't Going Away

Tom Konrad

zoltek logo.pngOn March fifth, St. Louis, MO based carbon fiber manufacturer Zolek’s (NASD:ZOLT) shares jumped 14% to $10.52, having traded as high as $11.70 intraday when Quinpario Partners LLC  and allied investors disclosed a 10.13% stake in the company.

Jeffry Quinn wants to help Zoltek penetrate new markets and increase its global presence.

Quinpario is an investment firm  focused on the specialty chemicals and performance materials sectors, and also based in St. Louis.  The firm was founded in 2012 by Jeffry N. Quinn and several senior executives from Solutia Inc, after Quinn and his team sold Solutia to Eastman Chemical Co. (NYSE:EMN.) Over the eight years leading up to the sale, they had  transformed Solutia from a bankrupt local commodity chemical producer into one of the world’s leading global specialty chemicals firms.

A Troubling Response

Zoltek isn’t bankrupt, but after years of underperformance Quinn and his team are confident it could use their help.  Zoltek’s President, CEO, and Chairman of the Board, Zsolt Rumy thinks otherwise.

Quinpario first approached Rumy privately, with two scenarios to allow them to take a stake in the firm and benefit current shareholders.  According to a letter they sent to Rumy, they proposed either an acquisition of all Zoltek’s outstanding shares at a price “in the mid teens,” or a large investment in the company which would “fund a sizable special cash dividend” for existing shareholders.  The only reply was one of dismissal from Zoltek’s legal council.  Zoltek’s board had not formally considered the proposals, and was unwilling to engage with Quinpario to discuss the matter.

Quinnpario called this “a troubling response given the substantial value to shareholders offered by each of Quinpario’s proposed alternatives.”  I would go further, and say that it’s arguably a breach of the board’s fiduciary duty to shareholders not to discuss a potential offer for the company which valued the stock at approximately twice its market price at the time (less than $7 a share in November 2012.)  While the board will doubtlessly argue that no formal offer had been presented, shareholders would likely have been better served if the board had chosen to explore Quinpario’s ideas in an attempt to turn one into a formal offer.

In an interview, Quinn emphasized to me that his investment firm is “not a hedge fund” and that he and his team are focused on creating shareholder value.  ”We’re not looking to create returns by being a pest.”

Call for a Special Meeting

Yet Rumy and Zoltek’s board seem determined to treat Quinn as if he were only a pest.

In its press release and SEC filing yesterday, Quinpario requested a special election to allow shareholders a vote on removing the current board and replacing them with Quinn and his slate of directors.  Zoltek responded the same day, stating that the request was “deficient in several material respects” and that no special meeting would be called.

Rumy’s Rebuff

In a quote, Rumy stated,

Our Board members own a significant amount of Zoltek’s stock and, accordingly, our directors’ financial interests are directly aligned with those of our shareholders at large. We will continue to focus on building long-term shareholder value by leading the commercialization of carbon fibers.  Of course, if Mr. Quinn`s group were to submit a bona fide proposal that adequately compensates our shareholders for the value of our technology, industry-leading capacity and future growth potential, our Board would be pleased to consider it.

Rumy’s statement about the boards’ financial incentives is misleading.  According the the company’s most recent proxy statement,  the vast majority of stock owned by the board is owned by Mr. Rumy himself.  As Rumy is President, CEO, and Chairman of the company, his interests cannot be considered to be “directly aligned” with shareholders’.  He also has interests in maintaining control of the company he built, and in keeping his job.  Other board members collectively own only 1.55% of outstanding shares, and three directors own less than 38,000 shares each.  Hence, the prospect of future compensation from retaining their positions is likely to be a significant influence on a majority of the board, quite possibly more significant than the lure of raising the value of their current holdings.

Rumy’s implication that Quinpario had not submitted a “bona fide proposal that adequately compensates our shareholders” is also misleading.  While the offers made in November were not fleshed out, they seem to offer “adequate compensation” for shareholders.  Had the board chosen to discus them at the time, they might have well become “bona fide offers” by now.

I have no doubt that Zoltek management will “continue to focus on building long-term shareholder value” under the current board.  The problem is that, if history is any guide, they won’t actually produce much value.  The share price has been flat since 2009, despite a large decline from a high of over $48 in late 2007.  With such a poor track record, an offer of outside expertise should be welcomed.

What Comes Next

If the Company remains committed to the status quo, the window of opportunity will quickly close as others usurp Zoltek’s rightful role in the carbon fiber market.

Zoltek’s board has a staggered structure, meaning that Quinn and his allies will not be able to replace a majority of the current board without a special meeting of shareholders until 2015 at the earliest.  They are unlikely to wait that long.  As Quinn told me, his team sees a real opportunity to increase Zoltek’s penetration of new markets, and to increase its global presence.  While he says that while they won’t “be deterred by short term obstacles, this opportunity will not be around forever. ”

As he wrote in his letter to Rumy, “If the Company remains committed to the status quo, then the window of opportunity will quickly close as others usurp Zoltek’s valuable market position and its rightful role in the carbon fiber market.”  Given this sentiment, I don’t expect Quinn and his partners will tolerate continued rebuffs from the board for long.

In November, when the share price was below $7, they were willing to offer a price per share “in the mid teens.”  If the current board refuses to cooperate, I expect they will launch a hostile bid for the company, rather then submit to the interminable process of trying to replace a staggered board over multiple years.

Zoltek’s investor relations contact did not respond to multiple requests for an interview in time for publication.

Disclosure: Long ZOLT

This article was first published on the author's Forbes.com blog, Green Stocks on March 7th.

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.

March 17, 2013

Does SolarCity Run a Capital Efficient Operation?

by Debra Fiakas CFA

SCTY residential solar.png The last post “SolarCity's Investor Disconnect” visited the oft repeated flogging of a company missing consensus estimates.  SolarCity (SCTY:  Nasdaq) reported strong sales growth in the December 2012 quarter, but the net loss was far deeper than expected  -  at least as suggested by published consensus estimates.  Investors immediately held the company accountable for the miss.  A closer look at the consensus reveals it is there is a great deal of disagreement on SolarCity’s fortunes.

We can debate whether a company should be measured against a shakey consensus earnings estimate.  However, that would be a waste of time.  Since the stock has been trimmed back, it makes more sense to figure out whether there is anything happening at the solar panel installer that makes sensible a contrarian, long position.

Along with top- and bottom-lines, SolarCity reported a string of accomplishments in the year 2012.  The customer base grew more than four times.  That is probably why total leased solar systems topped $1 billion by the end of the year.    Contracted payments for all those leased systems totals $1.1 billion  -  a number akin to a backlog.

As impressive as all these numbers might appear, for me it is really not enough to get involved with SolarCity.  I need to know the company is running an efficient operation.  SolarCity has this unusual business model with revenue coming from sales of solar systems as well as recurring payments from leased systems.  Financing is a key driver of both revenue streams.

So a look at SolarCity’s financing interval is the first place to begin looking  -  how much financing the company needs to support operations.  We all learned this in financial accounting.  Inventory Days plus Accounts Receivable Days tells us how many days worth of sales have to be financed by the company.  At the end of 2012, Inventory Days Outstanding totaled a whopping 413 days and Days Sales Outstanding in Accounts Receivable were 71 days.

Of course, the cheapest source of financing for operations is credit from suppliers.  At the end of 2012, Payables Days totaled 296 meaning SolarCity is in good enough favor with its suppliers to credit for nearly a year’s worth of supplies.  So we have a financing interval of 206 days (413 days plus 71 days minus 296 days) that have to be covered by some other source of financing.  Put in dollar terms based on sales in 2012 $72.6 million dollars.  The calculation goes like this:  $128.7 million sales in 2012 divided by 365 yields a dollar value of sales per day.  Then multiplied by 206 days tells us what has to be financed.

Having just gone public we have limited visibility on SolarCity’s track record in managing its working capital.  If the financing internal of 206 days at the end of  2012 appears lengthy, the same measure for 2011 was absurdly low at just 11 days.  SolarCity it seems was able to string suppliers along on average over three years!
We can take a couple more insights from this exercise.  Collections on accounts receivable is excellent  -  just 71 days.  What is more, the number of days worth of sales held in inventory has been more than cut in half.  Still there were 413 days worth of sales sitting in inventory at the end of 2012.  There is still room for improvement.

Thus we get a bit of encouragement and a bit of reality from SolarCity’s balance sheet.  Shares of SolarCity have been trimmed back, but not enough for me.   I would pay the price if the company were closer to profitability or further along in managing working capital.
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. 

SolarCity's Investor Disconnect

by Debra Fiakas CFA

SCTY residential solar.pngThis week solar panel installer SolarCity (SCTY:  Nasdaq) made its first earnings announcement following its initial public offering in December 2012.  The event was much anticipated even if only to get a glimpse of the company’s most notable (or it’s that notorious?) investor Elan Musk. 

Billionaire Musk was mostly recently in the public eye because of a spat with a New York Times reporter over one of Musk’s other major investments, Tesla Motors (TSLA:  Nasdaq).  The reporter was entrusted to road test one of Tesla’s electric sports cars and ended up writing a scathing article about the failure of the car to hold up to performance promises.   It turned out to be one of those “they said this and he said that” situations with Musk and reporter talking past each other in the social media.  In the end Musk prevailed after Washington Post and CNN reporters figured out their fellow journalist at the New York Times was probably just not car savvy enough to make a road trip in any car, let alone one that requires consistent driving skills as well as a strategy for charging batteries.

Musk came out of the road test brouhaha a bit diluted in my view.  So it seems SolarCity is in the same shape as its largest shareholder. 

SolarCity reported $14.0 million in total revenue in the December 2012 quarter, twice the top-line in the prior-year quarter.  That sort of top-line growth was expected.  Unfortunately, SolarCity reported a much deeper loss than expected  -  $0.54 per share compared to the consensus estimate of $0.44.  For all the billions invested by professionals there, a dime is big on Wall Street.  The stock price immediately gapped down by 8.2% as trading opened the morning after SolarCity’s earnings release and conference call.

Admittedly, my interest in SolarCity is after the fact.  I am always amazed at the hair trigger response of investors to quarterly earnings surprise, especially when an unseasoned security like SCTY is the target.  Certainly, the “shortfall” or “upside” is an instructive guide for investment decision makers, but only when the benchmark consensus is reliable.

In fact, there is quite a bit of dissent in the SolarCity earnings consensus.  There are seven contributors to the Thomson Reuter’s consensus estimate for the March 2013 quarter.  The mean estimate is a negative $0.29 per share on $29.2 million in revenue.  However, the range of estimates is so wide you have to wonder if these seven analysts are looking at the same company.  The lowest earnings estimate is a loss of $0.48 per share and the highest is a loss of $0.04 per share.  That is a pretty wide range in viewpoint.  Some of this can be explained by disagreement on the amount of sales the company will record in the quarter.  The range of sales estimates is from a low of $21.3 million to $33.8 million.  Still, it appears there is some difference of opinion on costs and expenses as well that is driving loss estimates.   The same sort of disagreement is in evidence for year 2013 and year 2014 estimates.

191x63logo_green[1].pngGranted, a group of analysts will have differences in expectations for any given company.  However, just three months after the SolarCity IPO, you would not expect to see such wide disparity in estimates.  After all, the roadshow exercise should have laid SolarCity open to a fairly thorough vetting.  What is more all analysts would have started from largely the same vantage point  -  the prospectus.

 Yet here we are today with SCTY trading 15% off its pre-earnings release price at $19.27 per share  -  all because the company failed to report earnings in alignment with what is clearly a jumbled set of expectations.  Should a company be held accountable when investors cannot agree on a benchmark?

Perhaps the more important question is why so many smart people cannot pin down sales and profits in the first place.  Could it be that SolarCity’s communication with investors is…well…lacking? Indeed, there may be a bit of pattern here in Mr. Musk’s investment portfolio.  Both Tesla and SolarCity appear to have trouble getting their message across to the public about performance expectations.

Fortunately, for those of us who are late to the party, disconnection of this sort presents a perfect buying opportunity.  Next post, we will look at all the reasons a long position in SCTY makes sense and a few more reasons to be cautious.
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. 

March 16, 2013

Suntech Plunges as Reckoning Day Approaches

Doug Young

Suntech logo]I rarely write about the same company 3 times in a single week, but in this case the developments are coming so quickly at plunging solar panel pioneer Suntech Power (NYSE: STP) that an update to this fast developing story is necessary. Company watchers will know that Friday was the official deadline for Suntech to repay some $540 million in bonds that have just come due. The company has no cash to make that repayment, and earlier this week received a 2 month extension on that deadline from a majority of bondholders. (previous post) Meantime, Chinese media reported earlier this week that Suntech could declare bankruptcy sometime between March 15-20, which means such a move could come as soon as today if the reports are true. (English article)

Not surprisingly, all the talk has taken a toll on Suntech's already-battered shares. Suntech stock has lost nearly half of its value this week, including a nearly 20 percent plunge on Thursday in New York that sent it to an all-time low. Shares were down by 50 percent at one point on Thursday from their previous close, as the company's trading volume tripled from its usual levels.

The trading was so frantic that the New York Stock Exchange took the relatively unusual step of asking Suntech to issue a statement on what was happening. Not unexpectedly, Suntech said it was unaware of any undisclosed events that may have triggered the huge sell-off and surge in trading volume. (company statement) Suntech added that it had no plans to repay the bonds that were maturing on March 15, and added its previous disclosure that 60 percent of the bondholders had agreed to a 2 month extension.

So what's happening here, and will Suntech in its current form live to see another week? I suspect the sell-off was a direct result of the bankruptcy rumors, combined with investors skittishness as the official March 15 deadline approached. Accordingly, many people who previously hoped to make some quick money on a company turnaround finally decided to dump their shares before Suntech's stock became worthless, which is what usually happens with a bankruptcy reorganization.

As to the future, the next week will certainly be a pivotal one for Suntech but may not necessarily mark the end of the current saga. Suntech's founder Shi Zhengrong has been forced from both the CEO and chairman's job at his company, but still remains its controlling stakeholder with 60 percent of its stock.

I suspect the board and Suntech's new top management are pushing for the bankruptcy, which is probably a conditions for a government-led rescue plan. Such a bankruptcy would also conveniently remove Shi completely from the picture by making all of his shares worthless.

It does seem like Shi's control of the situation is weakening daily, and I honestly wouldn't be surprised if the board manages to force a bankruptcy filing against his will. But Shi is also a very determined man, so I wouldn't completely consider him defeated just yet. At the end of the day, I would put the chances for a bankruptcy filing by this time next week at around 60 percent.

Bottom line: Suntech's day of reckoning could come in the next week, with the chances of a bankruptcy filing during that time at greater than 50 percent.

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.

Alt Energy Mutual Funds and ETFs Shine, But Risk Remains

By Harris Roen

Mutual Funds (MFs)

All of the alternative energy MFs were up handsomely in the past three months. The biggest gainer was Firsthand Alternative Energy (ALTEX), up 27.3% for the quarter, which also moved ahead in its ranking. Even the lowest three-month gainer, Brown Advisory Winslow Sustainability Fund (BAWAX), was up an impressive 9.2%.

Mutual fund returns

One-year returns were more variable, ranging from a gain of 18.0% for AWATX, to a loss of 11.7% for ALTEX. This has much to do with the solar holdings in these funds. For example, companies in ALTEX such as JA Solar (JASO), Yingli Green Energy (YGE) and JinkoSolar (JKS) have had outstanding quarterly returns, but are still down substantially for the year.

Exchange Traded Funds

The average three-month return remains high for alternative energy ETFs, at 13.6%. The notable exception is GRN, which has suffered from the steep drop in carbon prices. Two solar ETFs have done the best in the past three months, TAN and KWT. Both these funds, though, have taken a beating over the longer term, as can be seen in their one-year and three-year returns.

ETF Performance

PowerShares Global Wind Energy Portfolio (PWND) is no longer trading, and closed out at $6.23/share on February 26th. What happened was that the amount of assets under management were too low for the company to justify keeping the fund open. This is not an uncommon occurrence in the over-crowded ETF world. KWT, GRN and First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID) are also on watch for having the potential to be shut down and liquidated. This is a good reminder that care should be taken, as many alternative energy investments can be highly speculative on both the upside and the downside.

About the author

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


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

Remember to always consult with your investment professional before making important financial decisions.

March 15, 2013

Codexis Moves to the Front With CodeXyme4

Jim Lane
CodeXyme improvements.png

Compared to prior generations, CodeXyme 4 and CodeXyme 4X significantly reduce the cost of cellulosic sugar production for biofuels and bio‐based chemicals.

In California, Codexis (CDXS) announced the launch of CodeXyme 4 and CodeXyme 4X cellulase enzyme packages for use in producing cellulosic sugar for production of biofuels and bio‐based chemicals.

Codexis’ latest generation of advanced cellulase enzymes, CodeXyme 4 for dilute acid pretreatments and CodeXyme 4X for hydrothermal pretreatments, exhibits excellent performance, converting up to 85% of available fermentable sugars at high biomass and low enzyme loads. Combined with high strain productivity using the CodeXporter® enzyme production system, this allows for a cost‐in‐use that the company believes will be among the lowest available once in full‐scale commercial production.

CodeXyme 4 increases performance 10‐20% over Codexis’ last generation product, CodeXyme 3, measured by the amount of glucan converted into C6 fermentable sugar. For pre‐treatments with unconverted xylan, CodeXyme 4X maintains the same high C6 sugar activity while having additional C5 sugar conversion.

“After four years of development using our CodeEvolver directed evolution technology platform, we are proud to announce that our high‐performing CodeXyme cellulases are broadly available for the first time,” said John Nicols, Chief Executive Officer of Codexis. “CodeXyme has been tested against other commercially‐available cellulases and we have found the performance to be equal or better than alternative enzymes, across various feedstocks and pre‐treatment types. We expect CodeXyme cellulase to deliver significant cost savings and yield improvements for industrial‐scale production of cellulosic sugars.”

What does it mean?

Well, think a lot of things, but above all, think them in Portuguese.

This advance from Codexis — while having applications across a broad set of applications and geographies, has “Brazil” written all over it, and Codexis execs, speaking about the technology at World Biofuels Markets, confirmed that Brazil was on the radar.

Why? Iogen has parted with its other businesses and is laser-focused on commercializing its cellulosic ethanol technology with Raizen in Brazil — with no official enzyme partner announced to date. Not to mention that Raizen is the largest single shareholder in Codexis. Not to mention all that lovely bagasse. Not to mention that Raizen has been talking up their interest in cellulosic ethanol.
CodeXyme manufacturing.png

Leading Enzyme Performance?

During the past several months, CodeXyme cellulase has been tested on a variety of feedstocks and pre‐treatments, including corn stover, corn cobs, sugarcane bagasse, cane straw, wheat straw and rice straw. In all cases, CodeXyme 4 and 4X have been found to convert 75 – 85% of glucan and xylan into C6 and C5 sugars, at 10 – 15g enzyme per kg of glucan. With consistently high sugar conversion, customers are able to convert more sugar into high‐value biofuels and bio‐based chemicals.

Head to head with Novozymes, Dupont

In independent third‐party tests with the National Renewable Energy Laboratory (NREL) in Golden, Colorado and Chemical Engineering Research Consultants in Toronto, Canada, CodeXyme cellulase performed comparably or better than other leading enzymes. The studies compared the conversion of glucan to C6 sugars on dilute‐acid pre‐treated corn stover, using leading commercial enzyme products at their optimal pH and temperature. CodeXyme 3 (Codexis’ cellulase enzyme from 2011) was found to convert the same or more glucan at the same enzyme load as competing cellulase packages, and CodeXyme4 fared even better against the latest alternative commercial enzymes.

Commercial and Manufacturing Plan

In September 2012, Codexis established a robust applications capability and has since sold CodeXyme 4 and 4X to over a dozen potential partners and customers at lab and pilot scale. CodeXyme cellulase has been used successfully to hydrolyze biomass pre‐treated with both acid‐based and hydrothermal methods, as well as in sequential and simultaneous hydrolysis and fermentation.

Codexis is scheduled to scale up its novel CodeXyme 4X cellulase strain at commercial scale in the second quarter of this year. CodeXyme 4X cellulase will also be used in pilot production of bio‐based CodeXol detergent alcohols in collaboration with Chemtex in Rivalta, Italy by mid‐year.

More on the story.

Here are two must-reads.

An 11-slide deck from Codexis - the CodeXyme4 launch presentation.

CodeXyme4 product and applications info.

Disclosure: None.

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

March 14, 2013

Chinese Solar Stocks Sell Off on Suntech Delay

Doug Young

Solar investors are feeling decidedly bearish this week, bidding down shares in most major solar panel makers even as a few major names including Suntech Power (NYSE: STP), Canadian Solar (Nasdaq: CSIQ) and JinkoSolar (NYSE: JKS) tried to prime the market with upbeat news. But truth be told, the news from all 3 of these companies looks marginally positive at best, which clearly wasn't enough for investors who have grown tired of the non-stop bad news from an industry that has been struggling for 2 years now due to massive oversupply.

Let's start our solar day with a look at Suntech, which was facing a Friday deadline to repay more than $500 million in bonds, even though it lacked the cash to make the repayment. Suntech has been trying to renegotiate new terms for the bonds since last fall, and has just announced that a majority of those bondholders have agreed to an extension of the current March 15 deadline. (company announcement)

Suntech said that 60 percent of the bondholders have agreed to extend the March 15 deadline by 2 months to May 15 as everyone works toward a "consensual restructuring." Suntech shareholders weren't too impressed by this delaying tactic, with the company's shares tumbling nearly 9 percent in New York trade after the announcement.

Everyone is clearly growing tired of Suntech's stubborn founder Shi Zhengrong, who is doing everything he can to postpone an eventual restructuring of his company. That overhaul will inevitably force him to leave his company and also to hand over most of the 60 percent of its shares he controls. Now it seems we'll have to wait until May for that to happen.

Meantime, Canadian Solar, a relatively healthy player compared to Suntech, has just reported results that look modestly upbeat though still nothing to get too excited about. Perhaps most significantly, the company reported its unit sales returned to an uptrack in the fourth quarter, when it shipped 404 megawatts of panels, up from 384 megawatts in the third quarter. (results announcement) But the fourth-quarter figure was still down from the fourth quarter of last year.

What's more, the company's revenue continued to decline sharply, its net loss continued to widen, and it gave weak guidance for the current quarter, all indicating a true turnaround is probably still at least a year away. The report didn't do very much to help Canadian Solar's stock, which tumbled 15 percent after the report came out.

Lastly there's smaller solar panel maker JinkoSolar, whose chief executive also tried to make some upbeat remarks while attending the National People's Congress taking place in Beijing. Chen Kangping forecast that the best managed solar panel makers could return to profitability as soon as the second half of this year, and that most companies that can survive 2013 should be able to become profitable again next year.

He added that his own company now has more orders than it can handle, echoing similar comments about a recent spike in demand from larger rival Yingli Green Energy (NYSE: YGE) 2 weeks ago. (previous post) Investors greeted Chen's words with indifference, bidding down JinkoSolar's stock by 10 percent.

All of this shows that investors are getting tired of industry executives' repeated forecasts of recovery, even though such a recovery never seems to come. Look for shares to stay in the doldrums until one or more players finally returns to profitability, or until Beijing takes some stronger action to restructure the sector by forcing smaller, weaker players to either close or merge.

Bottom line: The latest sell-off of solar shares indicates investors are tiring of industry executives' repeated forecasts of improvement that never comes.

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.

March 13, 2013

Time to Buy Solar Stocks

By Jeff Siegel

Here's Deutsche Bank's latest comments on the state of the global solar market:

“We see the sector transitioning from subsidized to sustainable markets in 2014.”

That's a bold statement, and one that's sure to agitate solar haters.

But that's not our concern. Our concern is simply when it will be safe to jump back into the solar game.

According to analysts at Deutsche Bank, margins will rebound and profitability will return in the second half of this year. This is something we've been saying, too — although I suspect it'll be more towards the end of the second half of the year before we see enough consistency in production numbers to let the bulls back out of the pen.

In the meantime, I find Deutsche Bank's call on subsidies quite interesting. Because quite frankly, if they're right...

This Changes Everything

Deutsche Bank recently raised its 2013 global solar demand forecast to 30 gigawatts. This represents a year-over-year increase of 20%. Analysts say much of this will come as a result of strong demand in the United States, China, Germany, and India.

Interestingly, India's Ministry of New & Renewable Energy recently said India increased its renewable energy capacity by 12.4 gigawatts in the past three years, taking its total up to 26 gigawatts. This puts the Asian nation just four gigawatts shy of its 2017 goal of generating 30 gigawatts of power from renewables.

Of course, this should come as no surprise, as India is desperate to integrate more non-coal-fired power generation due to pollution issues and supply shortfalls.

As I mentioned last year, it's becoming increasingly difficult for India to secure coal supplies. The Economist reported that by 2017, domestic coal production in India will meet only 73% of demand. The country's already spent $7 billion over the past six years  acquiring outside coal pits in Australia and Africa.

India is in dire need of expanding its power portfolio to include less-pollutive sources, too. Last year, India was ranked as having the world's unhealthiest air pollution, according to a Yale study.

It's also worth noting that in India, solar has already reached grid parity — and that's with the high cost of capital.

That, my friends, is likely the main reason you're going to see the Indian solar market grow significantly over the next decade.

Clearly this is enough to make the folks over at Deutsche Bank quite bullish on India solar expansion. And Deutsche Bank isn't the only major player warming up to solar...

A Mainstream Source of Power

Earlier this year, analysts at investment bank UBS put out the following statement:

Solar has turned from a heavily-subsidized marginal technology into a mainstream source of power generation. Thanks to significant cost reductions and rising retail tariffs, households and commercial users are set to install solar systems to reduce electricity bills — without any subsidies.

UBS analysts have estimated there could be 80 gigawatts of unsubsidized solar installed in Germany alone.

Of course, Germany has been the leading catalyst for global solar growth for more than a decade now, thanks to an aggressive feed-in tariff scheme.

Today, Germans get about 25% of their power from renewables. In fact, thanks to a strong solar contribution, solar power now regularly provides significant power to meet peak demand.

Check it out:


This kind of diversification offers an enormous amount of flexibility, particularly during the summer months.

Coming Around the Bend

So, what does all this mean?

Well, for consumers it means that for the foreseeable future, the price of solar installations will continue to fall, making it more affordable for folks to generate cleaner, domestically-sourced power without relying solely on the grid.

For investors, it means we're coming around the bend on solar's dark days — and by the end of the year, it could be safe to jump back in these waters.

The major cell and panel manufacturers will be the most obvious route to take, but we're also staying diversified with solar technology plays.

In fact, my colleague Nick Hodge is very bullish on one little solar tech firm that boasts a unique technology with the potential to make solar cheaper than coal — while doubling power output.

Although this may not be the most mainstream way to play solar, it could prove to be the smartest...

And let's face it; that's all that matters.

To a new way of life and a new generation of wealth...


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

March 12, 2013

Is SolarCity a Wise Investment?

By Harris Roen

As a result of a disappointing earnings release, SolarCity (SCTY) took a shellacking on March 7th. The stock traded down 17.6% to the low of the day, and closed down 14.4%. Still, the stock is up 6.5% for the month, and the savvy investor would have gained 78% if they bought SCTY on the first day of trading in December 2012.

So what happened? Moreover, what is the outlook for this innovative solar company?

SCTY Losses Chart

It was no surprise that when SolarCity’s earnings results were released on March 6, the company had a net loss for 2012 (chart above). Though not as severe as the cash burn in other years since 2009, the company still lost $13.6 million for the year. This gave SolarCity a negative EPS of -0.54, which came in 23% lower than analysts’ expectations. These same analysts are seeing negative earning persist for the at least the next two years.

SCTY Revs Chart  

Not all the news was negative, though. Revenues grew tremendously for this company. Sales were up more than double of what they were in 2011, and almost triple that of sales in 2010 (chart above). The number of clients grew even faster, and though revenue per client decreased, the increased volume of clients more than made up for this (chart below). With the attractiveness of distributed solar in the U.S. going forward, and the expertise and desirable financing options SolarCity brings to the table, continued client growth is virtually assured.

SCTY Clients chart 
What I also find encouraging is that the customer acquisition cost, or the amount of money SolarCity spent to get a new customer, decreased dramatically in 2012. It reached an extreme of about $9,400 spent to obtain each new customer in 2011, but dropped to $1,223 in 2012. Compared to a revenue per customer in 2012 of $4,157, this is a hopeful sign for SolarCity’s business plan if these trends continue.

Though I still view SolarCity as an investment for the speculative portion of a portfolio, the long-term prospects for this company look good. It has had two impressive announcements of late – a contract with WalMart to install more than 4.7 megawatts of solar on stores in Ohio, and a high-profile partnership with Honda. Investors that are willing to ride the SCTY stock price rollercoaster are likely to be rewarded handsomely.


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

About the author

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

March 11, 2013

Lime Energy Sells ESCO Business to PowerSecure

Tom Konrad

Lime logo

On March first, Lime Energy (NASD:LIME) announced the sale of its Energy Service Contracting (ESCO) business to PowerSecure International, Inc. (NASD:POWR).

The deal will provide Lime with approximately $1.9 million in cash, plus the assumption of $9.9 million in liabilities associated with various ongoing projects, offset by $6.3 million in assets transferred to PowerSecure.  This makes the effective purchase price of the business approximately $5.5 million (not the $11.9 million I earlier reported).  The deal should be good news for both Lime and PowerSecure shareholders.

From Lime Energy’s Perspective

After nine months of worrying about misreported and potentially fictitious revenue, it’s easy for shareholders to forget that Lime’s strategy is to focus on its utility business and move away from more competitive ESCO services, where the company has less competitive advantage.

Although shareholders have not seen any financial data since Lime began the internal audit of its books last July, there have been numerous announcements of progress in its utility business.  Just this year, Lime has announced:

  • Exceeded their goal for  delivering energy efficiency savings in National Grid’s (NYSE:NGG) small business direct install program in upstate New York for the third consecutive year.
  • Completed their 1,000th project in their implementation of direct install program as part of New Jersey’s Clean Energy Program.
  • Exceeded their goal in the first year of implementation of Central Hudson Gas & Electric’s small and mid-sized business direct install program.

This progress in the utility businesses has not come without cost.  Lime has had to turn to its board Chairman and other boardmembers to obtain working capital in the last year, even though they entered 2012 not expecting to need to raise additional funds before achieving profitability.  Kiphart bought a one million shares at $2.55 a share and the board collectively lent the company $7.05 million in 2012, mostly in the form of convertible debt.

With the share price stuck in the $0.60 to $0.80 range, and likely to stay there until Lime is able to file audited financial statements, the sale of a non-core division should come as a relief to shareholders who have recently seen the value of their holdings diluted by the issuance of convertible notes.  The $5.5 million purchase price and $1.9 million in cash should make a significant difference to a company with a market capitalization of less than $19 million.  It should also allow Lime to focus its working capital on the growing utility business, and possibly repay some of the debt raised in 2012.

From PowerSecure’s Perspective

Given the lack of reliable financial information from Lime, it’s impossible to know the current value of its ESCO business.  On the other hand, Lime is unlikely to have been in a strong bargaining position, and from that alone we can expect PowerSecure received good value for its money.

With a $157 million market cap and $22.55 million in cash on its balance sheet, this deal will not be as significant to PowerSecure as it is to Lime.  Nevertheless, the company says that the acquisition will increase EBIITDA and earnings per share in 2013.  PowerSecure’s lower cost of capital should enable PowerSecure  to run the division more profitably than Lime has been able to.

PowerSecure’s CEO, Sidney Hinton, also expects to achieve some synergies from the division.  He said, “The addition of Lime Energy’s proven ESCO business provides additional capabilities that complement our existing best-in-class energy efficiency offerings and opens new potential channels for our LED lighting, distributed generation and utility infrastructure solutions.”


With this the sale of a non-core division raising apparently needed capital, Lime’s shareholders should not have to suffer additional dilution until the company is able to file its delinquent financial statements.  When that happens and dispels the cloud of uncertainty which has been hovering over the company, the share price should rise and Lime should be able to obtain any additional capital it needs on much more favorable terms.

PowerSecure shareholders, in turn, should benefit from the acquisition of a complementary business at what is likely to be a very reasonable price.

Disclosure: Long LIME

This article was first published on the author's Forbes.com blog, Green Stocks on March 1st.

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.

Soladiesel Algae Fuel is a Monster Hit

Jim Lane

Sales increase 35 percent at participating test sites — and survey results reveal driver preference for algae-based Soladiesel over conventional fuels.

In California, Propel Fuels and Solazyme (SZYM) announced that sales grew by 35 percent at Propel stations, offering SoladieselBD in a B20 blend during a 30-day retail pilot program, compared to non-test sites.

The pilot was conducted at Propel’s Clean Fuel Points in Redwood City, San Jose, Berkeley, and Oakland.

In addition, a follow-on consumer preference study with Propel’s customers found 92 percent of participants noted that they would be more likely to purchase algae-derived fuel for its environmental benefits; 70 percent indicated that they would purchase the fuel more frequently if it were derived from algae; and nearly 40 percent of customers indicated they would pay a premium for algae-derived fuel.

The pilot program marked the first commercial availability of algal derived fuels — and in the pilot program, SoladieselBD B20 was retailed at a parity price with conventional diesel fuel.

Solazyme and Propel picked up the Consumer Product of the Year (Fuels) in the 2012 Biofuels Digest Awards for the retail effort with of Soladiesel. As we noted last November in the Digest: “$27 per gallon? $15 per gallon? Fooey! Try algae-based fuels at “the same cost as regular diesel.”

What’s next

For now, the two companies are keeping mum about future roll-out plans.

In December, Propel Fuels closed on the initial phase of its Series D round of funding with $11 million in equity capital from existing investors Nth Power, Craton Equity Partners, and @Ventures as well as a new investor, Gentry Venture Partners. In addition, the company secured $10 million in debt financing.

With the new funding, Propel will be able to accelerate the build out of its network of stations that offer drivers the cleanest, most sustainable, domestically produced fuels on the market today. Propel currently operates stations throughout California and Washington State with more than 200 stations planned for new and existing markets over the next two years.

Solazyme’s cost performance and capacity-building

Solazyme’s lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that they believe would allow them to manufacture oils today at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter) if produced in a built-for-purpose commercial plant.
In 2012, Solazyme increased their owned capacity to approximately 8.000 metric tons through the expansion of a Peoria facility as well as the completion of their Phase I and II Solazyme Roquette Nutritionals facilities — but expects to have 550,000 metric tons of production capacity by 2015, which would support over $1 billion in product revenue.

At the same time, Solazyme has entered into non-binding offtake agreements with Dow Chemical and Qantas. Dow Chemical will purchase up to 20 million gallons (76 million liters) of Solazyme’s oils in 2013, rising to up to 60 million gallons (227 million liters) by 2015. Qantas will purchase a minimum of 200 to 400 million liters of Solazyme’s jet fuel per year.

Fuel performance and company reaction

Life Cycle Associates, an independent greenhouse gas measurement firm, determined that Soladiesel provides an 85-93% greenhouse gas emissions reduction when compared to conventional petroleum-based diesel. In addition, testing by the National Renewable Energy Laboratory (NREL) indicates that in a 20 percent blend, SoladieselBD significantly outperforms ultra-low sulfur diesel in total hydrocarbons (THC), carbon monoxide (CO) and particulate matter tailpipe emissions. This includes an approximate 30 percent reduction in particulates, a 20 percent reduction in CO and an approximate 10 percent reduction in THC.

“Our fuels have already been successfully demonstrated in fleet vehicles, corporate buses, military applications and the first U.S. commercial flight on biofuel,” said Bob Ames, VP of Fuels, Solazyme. “The successful pilot program with Propel further exhibits strong consumer appetite for the superior performance and environmental properties of Soladiesel.”

“Propel is committed to providing drivers true choice at the pump by bringing to market the world’s highest quality and most sustainable fuels,” said Matt Horton, CEO of Propel Fuels. “The results show strong preference for algae-based fuel, and we are thrilled to have partnered with Solazyme to enable our customers to be the first in the country to purchase this next generation biofuel.”

More on the story.

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.

March 10, 2013

When Will the Fog Lift of Biofuel Investors?

Jim Lane
Delays and cancellations photo via Bigstock

Investor flights GEVO, SZYM, AMRS — take off delayed by fog.

How soon will the potential of three of the hottest companies in the field be realized?

What are the key milestones coming up for the industrial biotech’s Gold Dust Triplets?

In Colorado, Gevo (GEVO) reported its Q4 and full-year 2012 results this week — and now the Q4 news for the gold-dust trio of Amyris (AMRS), Solazyme (SZYM) and Gevo is in — certainly the most highly-heralded three in the boomlet of cleantech IPOs in 2010 through early last year.

Today. we’ll look at those results briefly — but more importantly we would like to note the considerable fog which equity analysts are wading through in valuing the companies for the long-term. Fog that we believe is starting to lift — and the timing of that lift is where we would like to direct your attention to today.

For sure, it’s been a roller coaster ride.

Amyris originally opened in 2010 at $16.50, once traded over $30, but is trading at $2.97 today. Analysts at Raymond James, Piper, Cowen and Baird all have the stock rated at Neutral with targets between $3.32 and $4.00.

Gevo opened in 2011 at $15.50, once traded at a high of $26.36 and is trading today at $1.95. Analysts have the stock rated between Neutral and Outperform with targets between $3.00 and $9.00 — now, that’s a wide range.

Solazyme debuted two years ago this week at $20, once traded at a high of $27.47, and is trading today at $8.55. Analysts have the stock rated between Outperform and Underweight with targets between $5.00 and $10.50 — again, a wide range of values and we have a situation where analysts are recommending both “buy” and “sell” with seemingly no one in the middle.

Some of this — all analysts agree, is classic “sector compression” — where investor interest in giving lofty valuations to companies has evaporated based more on investor sentiment than a case of companies missing fundamental milestones.

But there have been slow-downs in scale-up — affecting Gevo and Amyris, and accounting generally for why these stock values have been more compressed.

When exactly will the fog lift — when will we have a materially clearer idea of the value of these companies? For early-stage companies it is much more about milestones rather than the kind of reporting on volume and price that drives quarterly reporting.

The fog-lift timetable


Q2 (June): Commissioning of phase 2 of the Solazyme Roquette joint venture’s Lestrem facility.

Q4: The Bunge (BG) Moema is expected to start production in Brazil.

Q2 2014 (Latest): Production starts at the Clinton, Iowa plant (with Archer Daniels Midland ).

Still in the fog: Timing of conversion of non-binding sales agreements with the likes of Qantas and Dow into binding contracts— a must for this year.


Q2 (May): Next quarterly results should give the first really clear look at renewable product margins not obscured as in the past by the legacy ethanol business, legacy inventory and limited plant output in 2012.

Q1 or Q2 (expected): A definitive agreement with Firmenich for the flavors and fragrances markets.

Q4 (latest): Amyris is expecting to generate $60M-$70M in collaboration funding from partners to offset its burn rate. If not, it will be forced to raise more money for scale-up and potentially dilute the share value.

Q3 and Q4. Amyris begins initial shipments under its Novvi lˇubricants JV and increases shipments with Kuraray. Lookm also for updates on shipments of specialty fluids (through the JV with Total).


March 20. A pretrial conference in the Butamax-Gevo patent dispute is expected should include a decision on claim construction that could heavily influence the patent trail.

April 1. Patent trial begins — resolution could be within the month. Raymond James’ Pavel Molchanov writes “we are of the view that Gevo enters this process in a substantively advantaged position. The reason is simple: last year, both the trial court and the appeals court firmly rejected Butamax’s request for a preliminary injunction against Gevo, with both courts explicitly finding that “plaintiff (Butamax) does not hold a valid patent, nor would defendant (Gevo) infringe if it did”.

Q2. Though Gevo is not guiding on specific dates for re-start at Luverne beyond a bland “sometime in 2013,” analysts expect restart in Q2, reaching full production by Q4.

Still in the fog: Start date for conversion of the Redfield (SD) plant, and the exact structure of future conversion agreements (e.g. how the value of a license turns into revenue).

Q4 2012 Financial results


Revenues for the fourth quarter of 2012 were $1.9 million compared to $17.2 million in the same period in 2011. The decrease in revenues resulted from the company suspending ethanol production at its Luverne, Minn. facility in May 2012. The net loss for the fourth quarter of 2012 was $13.2 million compared to $14.2 million for the fourth quarter of 2011.


Total revenue for the fourth quarter ended December 31, 2012 was $8.4 million compared with $14.9 million in the fourth quarter of 2011. Fourth quarter GAAP net loss attributable to Solazyme, Inc. common stockholders was $24.6 million, which compares with net loss of $15.6 million in the prior year period.


Aggregate revenues for the quarter ended December 31, 2012 were $5.9 million versus $41.5 million in the fourth quarter of 2011. Of the $5.9 million in aggregate revenues during the quarter ended December 31, 2012, $3.0 million related to renewable product sales compared to $0.7 million for the same period in the prior year. GAAP net loss attributable to common stockholders for the quarter was $43.5 million ($0.72 per share) compared to a loss of $59.4 million ($1.30 per share) in the same quarter of 2011.

Disclosure: None.

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

New Financing Models for Solar Energy

By Harris Roen

As more homeowners and business become interested in installing solar, a myriad of financing options have evolved. From third-party financiers to Solar REITs, the options available to benefit the renewable energy industry and end users keep expanding. This article highlights what alternative energy investors should know about trends in creative financing for renewables, and which investments should profit.

Solar REIT

What it is:

A Real Estate Investment Trust (REIT) is a security that invests directly in real estate. Investors can buy and sell shares of the REIT like a stock. The REIT can either own the property outright, or own mortgages, or both. REITs generally earn money from rents, or mortgage interest. Solar REITs take this concept and invest in solar properties.

Benefits of Solar REITs:

Typically REITs invest in commercial real estate (hotels, malls, offices, apartments, etc.), which allows investors to become shareholders in profitable real estate projects. A solar REIT generates large-scale financing and allows individuals to own a piece of a significant solar project.

Investment opportunities:

There is one REIT I know of that has a hand in solar, Power REIT (PW). This REIT owns the land under the huge 5.7-megawatt solar farm in Salisbury, MA. It also owns long-term leases on 112 miles of railroad that services Marcellus Shale natural gas developments.

There was an excellent analysis of the company by Forbes blogger (and AltEnergyStocks' Editor) Tom Konrad a few months ago when it was trading around $8/share. The stock peaked around $11/share about a month ago, and it is still probably a good buy if it moves down to the $10 range. Caution is advised, though, due to legal issues the company is working through. However, Konrad reports that there is light at the end of the tunnel for PW.

On another front, Bloomberg New Energy Finance reports that a new California startup, Renewable Energy Trust Capital, Inc., may soon win approval to start raising money as a solar REIT. Should this be approved, I expect more Solar REITs to become available to investors in the years ahead.

Third-Party Financing

What it is:

This is a model where a go-between or “third-party” puts up the money to pay for solar panels that are installed on a house or building. The third party makes money by being paid through one of a variety of creative arrangements. This type of third-party financing may also be used for large-scale commercial solar arrays.

There are many flavors of third-party financing, including joint ventures, lease pass-throughs, sale-leasebacks and others. In one example, a homeowner pays a set rate per kilowatt for the electricity they use from their solar panel. This is paid back to the third party, who owns the panel. Another arrangement is where the homeowner pays a monthly fee for the use of the panels, regardless of how much electricity is generated.

Benefits of Third-Party Financing:

One of the challenges of going solar is that the owner has to pay large up-front costs for equipment and installation. With third-party financing, the owner can get the benefit of clean power and reduced electric bills without having to fork out a large sum early on.

Investment opportunities:

This type of financial arrangement benefits solar companies up and down the business stream, from photovoltaic manufacturers to installers to third-party investors to companies that put the whole deal together. It is the latter type of company I find the most intriguing for investors, and is best exemplified by the recently ballyhooed IPO of SolarCity (SCTY).

SolarCity is not the only player here, there are many other companies implementing this business model including SolarWorld, SunCommon, OneRoof and others. Solar City, though, is the only publically traded company whose mission is solely focused on financing and installing solar for the masses, and they are committed to it on a grand scale. While SolarCity stock will likely be very promising for the long-term investor, currently it is not an investment for the faint of heart. My previous article lays out some of the risks, but once SolarCity hits its stride, returns could be robust and consistent.

A more tangential way to profit from this trend is to buy stock in some of the third-party investors themselves. These companies range the gamut of categories, and include Credit Suisse (CS), Google (GOOG), PG&E Corporation (PCG) and Honda (HMC). One of the more attractive options is U.S. Bancorp (USB) (USB), which according to Greentech Media has financed hundreds of millions of dollars toward residential solar Power Purchase Agreements. USB is trading at a reasonable PE of about 12.

Master Limited Partnership (MLP)

What it is:

A Master Limited Partnership (MLP) is a type of company that allows investors to buy shares of fossil fuel energy projects while getting favorable tax treatment. Since it is a partnership, taxes only go to the investors (or partners), and as a result taxes at the corporate level are avoided. U.S. Senator Chris Coons (D-Delaware) has introduced legislation to expand MLPs so that the MLP business structure can be applied to renewable energy projects.

Benefits of Master Limited Partnerships:

This favorable tax structure allows an MLP to sell “shares” like a corporation, but be taxed like a partnership. This generally allows MLPs to offer high yields for investors, a huge bonus in today’s low interest rate environment. Current MLP statutes only allow this finance model to be utilized for oil, natural gas, coal, and pipeline projects.

This has caused a boom in MLP fossil fuel investments. According to Senator Coons this creative finance structure has infused an estimated $290 billion in capital toward energy projects through about 100 MLPs. Investors have been rewarded: the Dow Jones Brookfield Global Infrastructure Master Limited Index is up 53% in the past three years, as compared to a 38% gain in the S&P 500 over the same time period.

Investment opportunities:

We are in the early stages of the movement toward allowing MLPs for renewable energy projects, but the prospects are promising. Bloomberg reports that ranking member of the Senate Energy and Natural Resources Committee Lisa Murkowski (R-Alaska) and other Republicans support the bill. If the legislation is enacted, I expect several new MLPs to be listed on one or more of the major stock exchanges this year.


These new trends in financing show a maturing of the alternative energy industry. It also reflects a confidence of large dollar financiers toward the economic viability of renewable energy projects.

Of course, individuals could use their capital to install solar panels on their roof to reap financial and alternative energy benefits directly. This may be an attractive option for some, especially considering the drop on the cost of PV panels. For others, though, taking advantage of one of the options above could be a good addition to a diversified portfolio of alternative energy investments.


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

About the author

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

March 09, 2013

Suntech: Shinier Days Ahead?

Doug Young

Suntech logo]With only a week before a key deadline for a big debt repayment, solar panel maker Suntech (NYSE: STP) appears to have cleared a major hurdle for a rescue plan by settling a big dispute with one of its major partners. I suspect that settlement with GSF, a builder of solar plants in Europe, was a major condition by Suntech's bondholders for a deal that could see the company avoid both bankruptcy or a takeover by Chinese government entities. In the meantime, Suntech's colorful founder Shi Zhengrong is speaking freely to the media about his forceful ouster earlier this week from the chairmanship of his company, in an ongoing series of power plays taking place behind the scene.

All this may sound quite complicated, but the story really comes down to a battle between Shi and Beijing. Shi desperately wants to remain at his loss-making, debt-laden company which has more than $500 million in bonds that will mature next Friday, March 15. Beijing is offering funds for a potential bailout, but only if Shi leaves the company.

In the latest development of this fast-developing saga, Suntech announced it has reached a settlement with GSF, an affiliated company that was buying Suntech's panels to build solar electricity plants in Europe. (company announcement) The dispute with GSF began last year and is a bit complex, involving GSF's failure to deliver millions of dollars worth of bonds that it had promised to give Suntech to use as collateral for a loan.

Terms of the settlement will see Suntech increase its stake in GSF to 88.15 percent from a previous 79.3 percent. But more important than the terms is the fact that Suntech has settled the matter, which was most likely a key condition for the renegotiation of Suntech's $541 million in bonds that will mature in a week. If that's the case, look for developments to come quickly in this deal, as Shi tries to reach a settlement with the bondholders that will allow him to stay at his company and avoid having to take a bailout from Beijing.

Such a deal would almost certainly force Shi to give most or all of the 60 percent of Suntech he currently owns to bondholders. That stake was worth billions of dollars just 2 years ago before the solar panel sector plunged into a major downturn due to a massive supply glut. But now the stake is worth just $132 million based on Suntech's latest market capitalization, which includes a 4.3 percent rally for its shares after it announced the GSF settlement.

Meantime, let's take a quick look at the latest media reports that show just how bitter and dirty the behind-the-scenes battle at Suntech has become as its reckoning day approaches. According to a report in the China Daily, Shi, who lost his CEO position last summer, said he was excluded from all meetings at the company over the past month before finally being kicked out of the chairman's job earlier this week. (previous post)

Shi added that he was "shocked" by his ouster, and called the move unlawful. This latest settlement with GSF would seem to indicate that perhaps Shi still wields some influence in the company, and that he may be able to craft a rescue plan that would avoid a government takeover. But even if he avoids a government bailout, Shi will most likely have to give most of his Suntech shares to bondholders, who will almost certainly also insist that he step aside and let more experienced executives come in to turn the company around.

Bottom line: Suntech's settlement of a dispute with a business partner could pave the way for renegotiation of a major bond that will mature next week.

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.

Plastics from Carbon Dioxide

by Debra Fiakas CFA

In the last post, I promised to close out this series on carbon dioxide capture with a note on a third example of Department of Energy funding for innovations in turning carbon dioxide (CO2) into a valuable raw material.  Besides changing the chemistry of inorganic compounds and feedstock for biofuel production, CO2 has some potential for plastics.  In 2010, the DOE placed a bet of $18.4 million on Novomer, Inc., which is a self-described sustainable chemicals developer.
The bet appears to be paying off as Novomer and its partners go into production of polypropylene carbonate (PPC) polyol using CO2 from industrial waste streams.  So far Novomer has produced seven tons of finished product containing more than 40% CO2 by weight.  The polyol was produced using waste CO2 from a processing plant owned by specialty chemical maker Albemarle Corp. (ALB:  NYSE) in Orangeburg, South Carolina.  Albemarle turns out active pharmaceutical ingredients at the Orangeburg plant.

A critical element in the process is Novomer’s proprietary enzyme that enables CO2 to react with petrochemical epoxides, resulting in thermoplastic polymers.  The PPC polyol will replace conventional petroleum-based polyether, polyester or polycarbonate polyols.  According to Markets and Markets Research, the global polyols market is expected to grow to $22.4 billion in annual sales by 2017. The growth is being driven by rapidly growing polyurethane plastics markets, particularly in Asia, Eastern Europe and South America.

Novomer believes it has conjured a highly economic product.  Novomer claims its polyols are stronger and more durable.  Accordingly, plastics using these ‘CO2’ polyols are expected to have higher tensile and load bearing capacity.   Since the CO2 is a waste product of an established manufacturing process, it is lower-cost than conventional petroleum-based raw materials.  Thus Novomer believes its polyol manufacturing costs will compare favorably against conventional polyol.

It is a wonderful story, but for investors looking for a play environmentally sustainable products, it is a tale of reduced expenses and not higher revenue.  The equity market rarely rewards low-cost scenarios with lavish multiples.  That said, lower cost producers, once they get to scale are often in a position to capture market share and that might make a difference for Novomer should it ever decide to go public. 
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. 

March 08, 2013

Suntech Nears Final Reckoning; Yingli's Sales Grow While Losses Narrow

Doug Young

New developments in the battered solar energy space indicate the day of reckoning is fast approaching for embattled Suntech (NYSE: STP), even as the latest results from rival Yingli (NYSE: YGE) are showing early signs of a rebound for the battered sector. Industry watchers will recall that cash-strapped Suntech has nearly $600 million worth of bonds that will mature on March 15, even though it lacks the money to repay the bondholders.

The company hired investment bank UBS in October to try and renegotiate the debt, though we haven't heard anything from the company since then. (previous post) Just 2 months before that, Suntech founder Shi Zhengrong resigned as the company's CEO but retained his title as chairman. (previous post)

Now Suntech has formally announced that Shi has also resigned his position as chairman, with US high-tech industry veteran Susan Wang set to take over that position. (company announcement) The announcement adds that Shi will retain his position on the company's board. But for anyone who likes to read between the lines, this move looks like the prelude to Shi's compete removal from the company that he founded, and I wouldn't be surprised to see him quietly leave the board altogether when the next elections are held.

Chinese media previously reported that Shi's removal from the company was one of the main conditions from Beijing as part of a broader government-led rescue package. With the $575 million in Suntech bonds coming due in less than 2 weeks, it now looks like Shi has been unable to reach a deal by himself with the company's creditors. I suspect Shi couldn't offer those bondholders very much, perhaps 20 cents or less for each dollar, and that many of those creditors think they will get a better deal if they wait for a government-led rescue package.

Against that backdrop, Shi's exit from the chairman's position looks like one of the final steps before the company announces a state-led bail-out that will likely see Beijing and other government entities inject more than $1 billion into the company in exchange for a major stake. Perhaps sensing an upcoming dilution of their shares, investors bid down Suntech's stock by 3 percent in Monday trade after the announcement came out.

Meantime, we should also take a quick look at the latest earnings report from Yingli, which pre-announced much of the report's highlights last week. (earnings announcement; previous post) The main addition in the final report was Yingli's actual profit situation, which looked relatively encouraging. The company's net loss for the fourth quarter came in at $200 million, a marked improvement from the year-ago net loss of about $600 million. But the latest loss was also slightly larger than Yingli's third-quarter loss, as it took a $19 million write-down for unsold inventory.

Shipments grew by an encouraging 40 percent for the quarter, while revenue was up by a smaller 30 percent, reflecting continued pressure on prices. In another piece of upbeat news, the company said it expects 2013 shipments to continue growing at about a 40 percent rate, as the sector rebounds and the company gains market share at the expense of smaller, less efficient players. Yingli shares were unchanged after the results came out, most likely due to the mixed nature of its report and the fact that it pre-announced many of the figures last week.

Bottom line: Suntech is likely to announce a major new rescue plan from Beijing in the next 2 weeks, while Yingli's latest results point to accelerating consolidation in the solar panel sector.

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

Phycal Captures CO2 Funding for Biofuel

by Debra Fiakas CFA

As part of its program to promote beneficial reuse of carbon dioxide, the Department of Energy awarded a total of $27.2 million ($3.0 million in the first phase and $24.2 million in a second phase) to a consortium led by alternative energy developer Phycal, Inc. (private).  According to the DOE website, Phycal is to develop an integrated system to produce biofuel from microalgae cultivated with captured carbon dioxide (CO2).  The biofuel is to be blended with other fuels for power generation or as drop-in diesel or jet fuel.

It is a bit of a stretch to see Phycal’s project as a bona fida “reuse” of CO2 that would have otherwise gone out into the atmosphere.  The company ferments the root food crop cassava (also called yucca or manioc) to produce ethanol.  Nonetheless, this is more by-product that final product, because what Phycal really needs are the sugars and CO2 that are also produced in the fermentation process.  That is because Phycal is principally focused on algae-based biofuel production and CO2 is the critical food source for growing algae.  Sugars give the algae an extra boost before the oil harvesting step.
The design does have a certain appeal.  Algal oil can be turned into a drop-in diesel or jet fuel that has significantly more versatility and lower distribution costs than ethanol.  Integration of the dual ethanol/biofuel plant affords precious economies that are vital to turn out a cost-competitive fuel product.

Phycal’s development partners include General Electric’s (GE:  NYSE) Global Research Group and Seambiotic (private) among others.  The group has set up a pilot cassava/algae farm near Hawaii’s Wahiawa, Oahu.  Phycal has some confidence in its ability to iron out the kinks in its process.  In late 2011, the company signed an off-take agreement with Hawaaiian Electric for delivery of 100,000 to 150,000 gallons of algae-based biofuel beginning in 2014.  The biofuel will be tested at the utility’s Kahe Generating Station.

Unfortunately, only accredited investors are in a position to get involved with Phycal at this stage in the company’s development.  A stake in its partner General Electric is a play on the myriad markets that are the targets of GE’s broad product portfolio.

Given that the world economy has yet to agree on a value for the liability of creating toxic CO2 emissions, it is impressive that work on CO2 sequestration has progressed at all, let alone the next step of finding uses for CO2.  Even though “carbon capture and use/reuse” gets little attention from investors, it appears to be quietly underway.  We expect the economic impact will be equally quiet, manifesting in lower costs rather than generating more visible new revenue streams.  However, knowing which companies are successfully harnessing the CO2 beast could be an advance look at higher earnings.

Basically, CO2 can be used in three major areas:  polymers, biofuels and inorganic materials.  The previous post “Capturing CO2 for Environmental Remediation” was about Alcoa’s (AA: NYSE) attempt to use CO2 for treating clay soil for environmental remediation  -  an inorganic material.  Phycal’s project is an example of biofuel production.  Next post will be a look at a polymer application.  
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. 

March 06, 2013

Obama's New Energy and EPA Appointments

Jim Lane
Ernest J. Moniz
Ernest J. Moniz is the nominee for US Secretary of Energy

In Washington, President Barack Obama nominated MIT professor Ernest J. Moniz as US Secretary of Energy, replacing Steven Chu, and nominated Gina McCarthy as EPA Administrator.

Moniz is currently serving as the Cecil and Ida Green Professor of Physics and Engineering Systems, as well as the director of the MIT Energy Initiative (MITEI) and the Laboratory for Energy and the Environment. He was formerly undersecretary of Energy and associate director of the White House office of science and technology policy under President Bill Clinton — and is a prominent academic voice in support of an “all-of-the-above” energy policy.

“President Obama has made an excellent choice in his selection of Professor Moniz as Energy Secretary,” said MIT President L. Rafael Reif. “His leadership of MITEI has been in the best tradition of the Institute — MIT students and faculty focusing their expertise and creativity on solving major societal challenges, a history of working with industry on high-impact solutions, and a culture of interdisciplinary research.” Reif continued, “We have been fortunate that Professor Moniz has put his enthusiasm, deep understanding of energy, and commitment to a clean energy future to work for MIT and the Energy Initiative — and we are certain he will do the same for the American people.”

According to MIT, more than two-thirds of the research projects supported through MITEI have been in renewable energy, energy efficiency, carbon management, and enabling tools such as biotechnology, nanotechnology and advanced modeling. The largest single area of funded research is in solar energy, with more than 100 research projects in this area alone.

mccarthy[1].jpgGina McCarthy is Obama's nominee for new EPA Administrator
Over at EPA, McCarthy has been serving as Assistant Administrator for EPA’s Office of Air and Radiation. Prior to her confirmation, McCarthy served as the Commissioner of the Connecticut Department of Environmental Protection. In her 25 year career, she has worked at both the state and local levels on critical environmental issues and helped coordinate policies on economic growth, energy, transportation and the environment.

“Today’s selection of Ernie Moniz for Secretary of Energy and Gina McCarthy as Administrator of EPA bodes well for the future of US energy and environmental policy,” said Mike McAdams, president of the Advanced Biofuels Association. “Dr. Moniz has an extraordinary understanding of the energy sector and is a globally respected leader in the space.  Ms. McCarthy over the last four years has demonstrated her ability to lead regulatory efforts on a number of areas including Advanced Biofuels.  The Advanced Biofuels Association applauds their individual contributions to our country and applauds and supports their nominations.”

Brooke Coleman, Executive Director of the Advanced Ethanol Council (AEC), applauded President Obama’s nomination of Gina McCarthy as Administrator of the Environmental Protection Agency (EPA).

“Gina McCarthy is the perfect choice. Her reputation as a doer with a deep understanding of the mechanics of critical air and energy regulations is well-earned. She has been very engaged on the development of the cellulosic biofuels industry and the administration of the Renewable Fuel Standard (RFS). She clearly knows how to get things done inside and outside of the agency, and the advanced ethanol industry looks forward to working with Gina McCarthy and her team.”

Bob Dinneen, President and CEO of the Renewable Fuels Association, today welcomed President Obama’s nominations of Gina McCarthy as Administrator of the Environmental Protection Agency (EPA) and Ernest Moniz as the next Secretary of Energy (DoE).

“Gina McCarthy is a very solid choice for EPA. She is knowledgeable, willing to listen, and straight-forward. She knows the EPA inside and out and has typically approached challenges with a common-sense determination to resolve them in a timely manner. As a Bostonian, I have to say I like her accent too.

“RFA and the ethanol producers we represent look forward to meeting with Secretary-designee Moniz to update him on the state of the U.S. ethanol industry, our track record of success in fostering greater energy independence, and the exciting results of ongoing investment in next generation biofuels.”

There are ever more way to earn RINs — although, suffice to say, it would have been more exciting if there had been go-to major projects that were immediate beneficiaries. Disclosure: None.
Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

Capturing CO2 for Environmental Remediation

by Debra Fiakas CFA

In 2009, the Department of Energy (DOE) awarded $17.4 million in funding to a gaggle of companies pursuing practical uses for carbon dioxide.  The recipients were asked to kick in a total of $7.7 million.  A year later in 2010, the DOE picked six projects to a second round of support totaling $82.6 million.

Industrial giant Alcoa, Inc. (AA:  NYSE) leads one of the winning groups, including partners U.S. Nels, CO2 Solutions (CST:  V or COSLF:  OTC/BB) and Strategic Solutions.  The DOE gave the Alcoa team $13.5 million to complete a pilot project for flue gas capture and conversion to a useful product.

The project is dependent upon a new in-duct scrubber technology to capture and treat flue gas.  The technology is being tested at an aluminum manufacturing process.  A by-product of aluminum production is alkaline clay or bauxite residue.  The project will combine the flue gas with enzymes and this alkaline clay and turn out a mineral-rich soil mix that can be used for environmental remediation.

The pilot is also dependent upon the effectiveness of special enzymes produced by CO2 Solutions and its partner Codexis (CDSX:  Nasdaq) -  carbonic anhydrase enzymes to be exact.  The enzymes are supposed to decrease the cost of the CO2 capture step.  Carbon dioxide and water converts to bicarbonate anyway, but the enzymes dramatically speed up the process.

In its most recent annual report, Alcoa reported progress on a pilot project involving technologies that would eliminate CO2 emissions, but was did not report specifically on the DOE funded project.  Aluminum production is among the most toxic of industrial processes.  Any reduction in emissions from Alcoa’s plants will be significant in the battle to reduce greenhouse gases.   The aluminum industry claims a reduction in perfluorocarbon (PFC) emissions by 77% over the last fourteen years.  Yet there is more to do.  Alcoa represents ‘big muscle’ in the industry and its leadership in technology development would probably send the entire industry in the same direction.

While a stake in Alcoa is simply a play on aluminum production, the shares of Codexis and CO2 Solutions are more clearly defined by carbon capture.  Alcoa towers over the two microcap companies in revenue.  Its stock trades at 9.8 times the consensus estimate and offers a dividend yield of 1.4%.  Neither Codexis nor CO2 Solutions have been able to generate a profit, so CDSX and COSLF trade like options on their technologies.
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. 

March 05, 2013

First Solar Retakes CdTe Crown

James Montgomery

logo[1].gifRoughly one month ago General Electric (GE) leapfrogged First Solar (FSLR) in thin-film cadmium-telluride (CdTe) solar photovoltaic (PV) conversion efficiency, with an 18.3 percent efficient champion cell -- a full percentage point higher than First Solar's 17.3 percent mark set last year.
Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

March 04, 2013

Dispatchable Geothermal Plant May Shape Future Deals

Meg Cichon

A fully dispatchable geothermal plant in Hawaii may influence power contracts in states like California that have a significant amount of energy but dwindling capacity with intermittent renewables.


The geothermal industry has been struggling with the same barriers to development for years. It's a frustrating situation: while geothermal is a reliable, steady baseload form of renewable energy, its development expenses overshadow its obvious long-term benefits. Meanwhile, other intermittent renewable sources such as wind and solar are able to take advantage – and control – of state renewable portfolio standard (RPS) policies and other incentives due to their lower costs of deployment.

‘Clearly we have a situation where geothermal is not given its due, it is not properly valued, and is being put on parity with wind and solar when we know they are intermittent technologies,’ explained Halley Dickey, director of business development at TAS Energy during a session at the recent REWNA Conference and Expo in Orlando, Florida. 

Considering these challenges, companies are burning the midnight oil to come up with innovative ways that make geothermal a smart, valuable investment for customers, and experts at ORMAT (NYSE:ORA) believe they may have come up with a winning solution. According to Paul Thomsen, director of policy and business development at ORMAT, it has strong implications for the industry as a whole in 2013 and beyond. 

The ORMAT project is set in Hawaii, where it recently built an 8-MW expansion on its 30-MW Puna geothermal power plant. In order to get the utility, Hawaii Electric Light Company (NYSE:HE), aka HELCO, to agree to purchase power from the expansion, ORMAT made the entire plant fully dispatchable, meaning that it is controlled by HELCO, who can ramp service up or down to serve the auxiliary energy load for the grid.

Hawaii has a unique situation in which it has too much power on its grid, however the state depends on imported oil for 90 percent of its energy needs, which greatly increases costs.  According to Thomsen, Hawaii has invested a lot into its diesel infrastructure, so it faces the dilemma to either stop purchasing diesel and invest in new geothermal equipment, or keep purchasing diesel using existing infrastructure.

‘From a utility perspective, the fuel costs pass through to ratepayers, so there is no impact on them as a company. Shutting down those power plants and purchasing new equipment does have a capital impact on them and they have to figure out as a company if they want to make that large capital investment to help ratepayers 10-20 years down the road,’ explains Thomsen. ‘I think they are starting to make those decisions, but at this point they are about 30 percent over capacity – they knew they wanted this geothermal power, but they had to justify it to the PUC, so that’s why they have us on grid support.’

The power contract for the Puna plant is significantly lower than the island’s wholesale prices, which are between US$0.20-$0.30 per kWh. The expansion allowed for 5 MW of the original 30-MW plant that is still on avoided costs to be reduced to a fixed rate of about $0.11 per kWh – a 50 percent savings. And for the new 8-MW expansion, Thomsen says they offered HELCO a price of $0.09 during peak, and $0.06 off-peak. 

‘We’re providing frequency control and power to the grid when the utility needs it, so they can say “Hey, were having problems; everybody is turning on their air conditioner and we need to ramp up the plant to 38 MW”,’ explained Thomsen. ‘Or they can say “It’s a relatively mild day, we don’t need this power; we want to back you off to 25 MW”.’

Thomsen believes this flexibility will influence power contracts in states like California that have a significant amount of energy but dwindling capacity with intermittent renewables. The California PUC is also considering decommissioning many power plants, and even some nuclear facilities face closure, as well, which could lead to significant renewable adoption.

Elaine Sison-Lebrilla, renewable energy program manager at the Sacramento Municipal Utilities District (SMUD) explained the future need and importance of geothermal on the grid during a geothermal session at the Renewable Energy World North America Conference and Expo.  She acknowledged the fact that the more wind and solar enter the grid, the more issues utilities will likely face in the future, and geothermal will be the renewable source that provides baseload power to support the grid. 

‘We’re going to have to back down from fossils, but we still need baseload, and that to me means biomass and geothermal – not next year or the year after, but in 5-10 years. There are a lot of policy issues in play,’ said Sison-Lebrilla. ‘But we know it’s there, we know that there are impacts on our grid, we know we have to do something in addition to bringing on solar and wind.’

Thomsen says he is seeing an increase in renewable portfolio standards (RPS) for two reasons – their design (through time they get bigger), and states are starting to look at removing compliance mechanisms. Nevada, for example, allows energy efficiency projects in its RPS, and they are seriously considering removing that, which would create more demand for renewables. So instead of buying a gas peaker plant, these states can look at existing geothermal fleets to support other renewable projects with baseload power. Thomsen says ORMAT is working with regulators to value geothermal’s ancillary benefits, and sees geothermal becoming increasingly more valuable in states that have purchased wind and solar but have no capacity.

Says Thomsen, ‘We are very bullish and optimistic on that fact that we are going to see more Power Purchase Agreements (PPAs) and better value because of what the power plant in Hawaii showed regulators and utilities geothermal can do.’

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on RenewableEnergyWorld.com and is reprinted with permission.

March 03, 2013

Ten Clean Energy Stocks for 2013: February Update

Tom Konrad CFA

Free Calendar Clip Art by Phillip Martin,
Clip Art by Phillip Martin
February was a month of consolidation after blistering January returns in clean energy stocks, and the market in general.  My clean energy benchmark, the Powershares Wilderhill Clean Energy Index (PBW), declined 2.2%, while the broad universe of small cap stocks which I benchmark with the iShares Russell 2000 Index ETF (IWM) eked out a 0.6% gain.

My ten clean energy picks for 2013 (introduced here), put in a relatively strong showing of  +1.5%, but that still leaves them trailing the benchmarks.  For the year, PBW is up 8.7%, IWM is up 10.1%, and my picks are up 6.8%.

The chart and table show individual stock performance through March first, for my ten picks plus the six alternative picks I presented in a second article.

10 for 13 Feb.png

Significant Events

Below, I highlight significant events I feel affected stock performance. 

February USD Return
TSX:WFI Waterfurnace Renewable Energy
NASD:LIME Lime Energy
TSX:PFB PFB Corporation
NASD:MXWL Maxwell Technologies
Amsterdam:ACCEL Accell Group
NASD:ZOLT Zoltek Companies, Inc.
NASD:KNDI Kandi Technologies
TSX-V:FVR Finavera Wind Energy
TSX:AXY Alterra Power
NYSE:WM Waste Management
Alternative picks
TSX:NFI New Flyer Industries
NYSE:LXU LSB Industries
NASD:AMRC Ameresco, Inc.
NYSE:HTM US Geothermal
TSX:RPG Ram Power Group

Lime Energy (NASD:LIME)

Lime Energy will continue to trade on NASDAQ until the exchange can review the company's appeal of a possible delisting.  There has not yet been any news about when the hearing will take place, or if the company is still on track to file restated earnings before March 31st.

On March 1st, Lime sold its ESCO business to PowerSecure International (NASD:POWR) for $5.5 million, leading to a 6% rally for the day capping off a 30% rally since the last update.

Maxwell Technologies (NASD:MXWL) gave back 10% after a 17% rally in February.  I think the decline was caused by profit taking and concern that a date has not yet been set for Maxwell's fourth quarter earnings announcement.  Last year, Maxwell announced earnings on February 16th, and set the date a week earlier. 

I don't think investors should be worrying that the delay is due to a reluctance to reveal some nasty surprise.  If management had been aware of such a surprise in the works, two small sales of stock by company insiders on February 7th would not have been allowed.  These two sales were dwarfed by the amount of restricted stock which had recently become available for these two insiders to sell, so I don't think the sales can be taken to imply that they think the stock has peaked, either.

Accell Group (Amsterdam:ACCEL)
Netherlands based global bicycle maker Accell Group fell 13% largely due to disappointing fourth quarter results.  While total sales were up 23%, that was mostly due to last year's acquisition of Raleigh. Organic worldwide sales growth was up only 3%, although sales shrank in its home market.

Operating profit excluding one-off items fell 17%, in line with previous guidance, but apparently lower than many investor's expectations.  The company expect to grow both sales and profit in 2013.

Electric bike continue to be Accell's strongest performing segment, and now account for 32% of sales.

Zoltek Companies (NASD:ZOLT)zoltek logo.png
Carbon fiber maker Zoltek shot up18% after a brief decline following the company's fourth quarter results on January 31st.  When I highlighted Zoltek as a buying opportunity in last month's update, I did not expect to be proven right so soon.

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF) finavera_logo[1].gif
Finavera was the other buying opportunity I highlighted last month.  Although it has risen 4% since then, I continue to consider the stock dirt cheap.

Alterra Power (TSX:AXY, OTC:MGMXF)
alterra logoGeothermal, Hydro, and Wind Power developer Alterra Power declined 9% on disappointing results from it's 66% owned HS Orka power plant in Iceland.  Over the longer term, Altera's share price will be driven by the company's ability to develop its projects and possible asset sales.  Wiggles in the earnings from its operating power generation should have much less effect, so I think the decline has made the stock increasingly attractive, and added a little to my position.

New Flyer Industries (TSX:NFI, OTC:NFYEF) new flyer logo
New Flyer continues the steady stream announcements of new contract awards adding to its already solid backlog.  A number of contracts for compressed natural gas buses drew the attention of Seeking Alpha author and advocate of natural gas for transportation Micheal Fitzsimmons.  He wrote a good overview of the company, highlighting its strength in natural gas buses.

On March 1st, the company announced the acquisition of Orion's aftermarket parts division.  This acquisition fits nicely into New Flyer's ongoing strategy of diversifying its revenue stream into businesses which are less cyclical than that for new heavy duty transit buses. 

Daimler unit Orion announced its exit from the North American bus market last year.  New Flyer has also taken up multiple contracts for new buses from Orion, including a contract for up to 381 hybrid buses announced on February 12th.

LSB Industries (NYSE:LXU)
LSB logo

Chemicals and climate control conglomerate LSB Industries announced earnings on February 28th, comfortably beating analyst expectations for earnings, but missing slightly on revenue.  After rallying strongly (19%) in January, the stock fell back 11% in the lead-up to the earnings announcement.  Market reaction since has been tepid.

My Forbes readers should have been able to play the company's large swing, since I highlighted LXU as a stock to sell on February 12th, with a suggested limit price of $42.  The stock traded as high as $42.15 on February 15th, but has since fallen to $38.27.   I personally sold covered calls on LXU, and intend to continue to do so until I'm eventually taken out of my position.  Time will tell which will turn out to be the best strategy.

Ameresco, Inc. (NASD:AMRC)
Ameresco logo
Performance Contracting Firm Ameresco fell 13% in February after warning that its fourth quarter earnings would be worse than expected on February 15th.  It said results would be impacted by storm related delays and fiscal uncertainty.  The actual earnings release was delayed on March 1st as Ameresco reviews the accounting treatment of an interest rate swap. 

Proper accounting for financial derivatives is always tricky and subject to judgement calls, so this accounting issue is unlikely to make a big difference to shareholders focused on the long term viability of Ameresco's business. 

The fiscal uncertainty and total dysfunction in Washington DC, is a more serious concern.  Ameresco's largest customer is the federal government.  However, I believe that the executive branch has the power and will to push ahead with initiatives which are likely to substantially increase the size of the performance contracting market over the next four years.  Hence, I continue to see the current weak stock price as a buying opportunity.

Ram Power Group (TSX:RPG)Ram Power Logo
Stock in geothermal developer Ram Power rose 5% in February on news that the second phase of its San Jacinto-Tizate project in Nicaragua had achieved full commercial operation and passed a 30 day performance test.  The company also announced a best efforts offering of secured debt and warrants.at C$0.30 (slightly above the current price) on February 27th.  The non-dilutive offering has so far had little effect on the stock price.


My picks so far continue to lag the bulk of clean energy stocks and the broad market, but they made up some ground in February.  Readers who purchased Zoltek and Finavera when I called them buying opportunities last month did very well on the former, and made small gains in the latter.

I continue to see Finavera as a buying opportunity, now joined by Ameresco and Alterra.  I personally added to my positions in Ameresco, Alterra, and Zoltek in February.


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.

March 02, 2013

BYD Profit Sputters

Doug Young

byd logo The number 94 seems to have special meaning for BYD (HKEx: 1211; 002594; OTC:BYDDF), the struggling car maker backed by billionaire investor Warren Buffett, which has just reported some preliminary data that show its profit last year fell 94 percent as it failed reverse its sharp decline of the last 2 years. But perhaps more alarming, this new data show the company's operations fell into the loss column in the last 3 months of 2012, even though it technically remained profitable overall due to strong government support. That means that 2013 could continue to be a difficult year for the company, which could start reporting some net losses as it struggles to regain its footing in China's competitive car market.

When I first looked at the newly issued report, the 94 percent profit drop in 2012 actually looked slightly encouraging. (earnings announcement) That's because BYD also reported a 94 percent drop in its third quarter profit and a 94 percent drop for profit in the first 9 months of the year, meaning the fourth-quarter profit also fell by 94 percent. Such massive drops certainly aren't anything to be proud of, but at least they show some stability and didn't get worse over the year.

But a closer look at this new data reveals that BYD's posted an operating loss for the year of 320 million yuan, or about $50 million. That loss contrasts sharply with the 33 million yuan yuan operating profit in the first 9 months of the year, meaning BYD's operations slipped sharply into the red in the fourth quarter with a 350 million yuan operating loss.

I suspect the only reason that BYD managed to post a net profit in the fourth quarter and for all 2012 was because it receives generous support from Beijing and its local government in the southern city of Shenzhen, which are both strong backers of its campaign to develop green energy cars and buses.

In one of the few slightly encouraging signs, BYD said the rapid deterioration in its operating profit was due to weakness in its solar energy business, as well as its older cellphone component business. By comparison, it said business at its car unit was stable as it introduced some promising new models to the market.

So, what kind of conclusions can an observer bring away from all of this? The answer is probably that BYD will continue to struggle for the forseeable future, probably at least the next couple of years. Its newer models appear to be gaining some traction, so perhaps we could see some improvement in its car sales after 2 years of sharp declines. But the solar business will continue to struggle, and stiff competition in the cellphone space will also continue to hurt that part of the business.

The biggest factor to watch will be the company's electric vehicle (EV) program that is both its biggest asset and its biggest liability due to the uncertainty of the future of alternative energy vehicles. After trying unsuccessfully to promote its EVs to general consumers, BYD has shifted to a strategy of targeting big buyers, mostly local governments, with pilot programs for its electric taxis and buses.

Many of those programs have just begun over the last year, so we should see later this year if the buyers like the product and start to expand their EV fleets. New EV orders by existing customers will be an encouraging sign if they come, but it will still probably be at least 2 years before EV sales make a meaningful contribution to BYD's business. In the meantime, look for the company to struggle, and for its stock to stagnate until it has some more positive news for investors.

Bottom line: BYD will continue to struggle for the next 2 years and could even fall into the loss column, as its traditional businesses stagnate and its EV program tries to gain traction.

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.

March 01, 2013

Solar: Big Gets Bigger, Small Suffers

Doug Young

Yingli logoA couple of new items from the battered solar sector hint that the situation may be improving for the largest companies, even as smaller players continue to struggle and face the very real danger of collapse. Of course I'd be remiss if I didn't point out that I've predicted a rebound for this embattled sector once or twice before based on optimistic company statements, and in each instance the rebound I was sensing never came. This time the difference could be that many smaller players have now closed or are tottering on the brink of insolvency, meaning they are losing share to the larger, relatively healthier players with more resources.

That situation is reflected in the latest news from Yingli Green Energy (NYSE: YGE), one of the sector's largest and relatively healthy players, which has just announced some preliminary fourth-quarter forecasts that look quite encouraging. (company announcement) Meantime, the smaller, China-listed Chaori Solar (Shenzhen: 002506) sent out the industry's latest warning signal, with word it may miss an upcoming bond payment. (English article)

Let's start with Yingli, as it's one of China's stronger solar panel makers and was actually earning a profit as recently as the second quarter of last year, even as most other players lost money for most or all of 2012 amid a prolonged global downturn. Yingli's preliminary announcement appears to show the company's sliding fortunes may have reached bottom in the third quarter of 2012, as both its sales and margins rebounded strongly in the fourth quarter.

Yingli said its fourth-quarter shipments rose 40 percent from the third quarter, well ahead of its previous guidance for a low teen percentage increase. The 40 percent rise was also much better than the previous 2 quarters, including a third quarter drop of 16.9 percent and a second quarter that saw shipments rise 13.7 percent.

At the same time, Yingli also reported its fourth-quarter gross margins would come in between -8 percent and -8.5 percent, partly due to one-time charges related to excess inventory and idle capacity. While it's never good to have negative margins, the fourth-quarter forecast was still a notable improvement from the -22.7 percent gross margin for the third quarter.

The company didn't comment on its profit situation, but it does appear that it will report another loss for the fourth quarter due to the one-time charges. If that's the case and sales and margins continue to rebound, we could see Yingli emerge as one of the first solar companies to return to profitability in the current quarter.

Shareholders seemed generally encouraged by the preliminary results announcement, bidding up Yingli shares by 2.3 percent after the news came out. A broader rally has seen Yingli's shares more than double from their lows in late November and early December, as investors bet that sunnier days are ahead for the sector as Beijing prepares a broader bailout plan that is likely to benefit the biggest companies like Yingli.

Meantime, the end of last week saw some mixed signals coming from Chaori, which said it might not be able to make a bond interest payment due on March 7 due to a cash shortage. But then a day later a top company executive said Chaori wouldn't miss the interest payment after all, thanks to intervention by the local government. (English article) This kind of intervention has become relatively common as local governments try to prevent companies from failing, though this is one of the first times a government has intervened to help a company with its bond payments.

Industry watchers will recall that former sector leader Suntech (NYSE: STP) also faces a much bigger bond-related headache in March, when nearly $600 million worth of its bonds will come due for repayment. Suntech hired UBS in October to help it renegotiate the debt with holders of the bonds, but we haven't heard any results yet of the negotiations. (previous post) At the end of the day I do expect we'll see Suntech reach a deal with the bondholders, though if it doesn't the government could also still come to Suntech's rescue the way it did with Chaori.

Bottom line: Yingli's preliminary fourth quarter results show the company may return to profitability in the current quarter, while smaller solar players like Chaori will continue to face a cash shortage.

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.

« February 2013 | Main | April 2013 »

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