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October 31, 2013

Five Alternative Energy Stocks For 2014

By Jeff Siegel

There's no doubt about it: 2013 was a fantastic year for alternative energy investors.

The big story this year was Tesla (NASDAQ: TSLA). A company that we began touting years before the company even went public, Tesla soared this year, taking the stock from $34.71 in January to a high of $194.50 a share in September.

Folks, a 460% gain from an electric car company in just nine months would've been laughable in 2013. Today, it's the one of the most hyped stories in the world of finance...

And if you listened to me a couple of years ago on this one, this also turned out to be one of your biggest gains ever.

Of course, while we remain bullish on Tesla as a force (and Elon Musk as the man behind that force), from an investment standpoint, we've already taken our winnings off the table. The company will likely continue to prove to be a great disruptor in the auto manufacturing space; but from a risk vs. reward scenario, Tesla is no longer particularly attractive for us.

That being said, if you're looking for a new car, you can't go wrong with a Model S.

Another big winner for us this year was another company in which Elon Musk has his hooks: SolarCity (NASDAQ: SCTY). SolarCity started the year at around $13.00 a share. Just this month, it a high of $64.50. That's a 396% gain in less than a year!

There were also a few more solar stocks that crushed it this year. These include:

All in all, 2013 turned out to be a great year to be an alternative energy investor.

The question now, however, is how will 2014 pan out for alternative energy bulls?

A Darwinian Smackdown

From 2005 to 2008, a massive alternative energy bubble was created.

Sure, in that time, we made a fortune... however, once the global economy imploded, recessions kicked in, and investment dried up, the alternative energy sector was particularly damaged.

But this turned out to be a good thing, as it enabled a much-needed Darwinian smackdown to wipe out the laggards and send the inferior companies packing. What was left was simply a handful of major players and an urgent quest to make the best mousetrap.

That's where we are now.

The only alternative energy companies left standing today are those with massive amounts of capital (or access to massive amounts of capital), disruptive technologies, and game-changing business models. Going into 2014, this is where we're focusing our alternative energy dollars.

Now before moving on, understand that while there's still an enormous amount of money to be made in the alternative energy sector, only a fool would ignore the necessity of diversification in the energy space.

In other words, while we continue to profit from alternative energy, we're certainly not turning a blind eye to things like domestic oil and gas and even coal, which I believe will begin to rebound in 2014.

But today, our focus is on alternative energy. So here are five alternative energy stocks on which I am bullish for 2014...

Hannon Armstrong Sustainable Capital, Inc. (NYSE: HASI)

Hannon Armstrong is basically a specialty finance outfit that offers debt and equity financing for modern energy and sustainable infrastructure projects. The company has actually been around for more than 30 years, and since 2000 has provided or arranged nearly $4 billion of financing.

HASI focuses primarily on infrastructure projects that have high credit quality obligors, fully contracted revenue streams, and of course, inherent economic value. Some of these obligors include U.S., federal, state and local governments, high credit quality institutions and utilities.

The company is actually the leading provider of financing for energy efficiency projects for the government.

HASI is broken down into three asset classes:

  1. Clean Energy – Projects that deploy cleaner energy sources, such as solar, wind, geothermal, biomass, and natural gas.
  2. Energy Efficiency – Projects typically undertaken by energy services companies that reduce a building's energy usage or cost through the design and installation of improvements to building components. These include (but are not limited to) heating, ventilation, air conditioning systems, lighting, energy controls, roofs, and windows.
  3. Sustainable Infrastructure – Projects such as water or communications infrastructure that reduce energy consumption and make more efficient use of natural resources.

I suspect these last two will get a nice boost in 2014 from Washington, now that Ernest Moniz, the new Secretary of Energy, has made it perfectly clear that his focus will primarily be on energy efficiency...

During his first speech as the new Energy Secretary, Moniz said: “Efficiency is going to be a big focus going forward. I just don't see the solutions to our biggest energy and environmental challenges without a very big demand-side response. That's why it's important to move this way up in our priorities.”

Funding will be needed for these projects, and HASI is pretty much the big fish in this pond.

Bottom line: This is great timing for Hannon Armstrong. And I'm personally looking to take a ride on this one.

Here's another interesting thing about HASI: It actually operates as a REIT.

As energy analyst Tom Konrad pointed out, by going public and converting to a REIT structure, HASI is tapping a pool of relatively low-cost capital from small investors.

Over the long term, I suspect HASI will hit all the right buttons with investors looking to invest in clean energy projects, as well as investors looking for some steady income in the energy space.

Although I doubt HASI will be able to deliver those double-digit dividends we've seen from some other juicy REITs out there, I do expect to see a 6%-7% dividend yield in a few more quarters.

All in all, I like HASI as a way to play the continued boom in modern energy integration and energy efficiency.

Pattern Energy Group (NASDAQ: PEGI)

It’s only been public for about a month now. And despite its successful (yet somewhat quiet) debut, Pattern Energy Group (NASDAQ: PEGI) seems to be slowly appealing to income-oriented investors looking for a piece of the renewable energy market...

Pattern Energy Group is an independent power company that owns and operates eight wind power projects in Canada, the United States, and Chile. Total owned capacity is just over one gigawatt.

Each wind project the company owns is contracted to sell nearly all of its output on a long-term, fixed-price power purchase agreement. Pattern also has two new projects in development. One is in Chile, a 115-megawatt project expected to start commercial operations in April 2014. The contract for this one runs through 2034. And the second project soon to go online is in Ontario. This one is a 270-megawatt project with a power purchase agreement locked in through 2034.

Overall, the weighted average remaining on contract life is about 19 years.

Management is quite conservative, and risks are minimal, as this is not a turbine manufacturer, but rather a developer operating primarily in wind-friendly regions.

Even with dirt-cheap natural gas, demand for wind — in the right places — remains strong.

Net profit for the first six months of 2013 grew from $6.44 million one year prior to $29.14 million, while revenue rose 62% to $102.54 million. Pattern has about $2 billion in assets and about $1.4 billion in liabilities. And for income-oriented investors, the company expects to offer a yield of approximately 6%.

For the 12 months ending December 31, 2014, management expects to generate $55.4 million for distribution and $217.7 adjusted EBITDA.

All in all, I actually like Pattern based on historical data and management’s ability to keep growth steady, but not overly risky. Whether or not that will be enough in today’s market is still questionable.

Broader market action and, of course, any potential loss of government support in Canada, the U.S., and/or Chile could chip away at this thing pretty quick. Even though power purchase agreements are already locked in, the market doesn’t typically distinguish these types of things when it comes to renewable energy. This isn’t necessarily a criticism, but rather a reality that investors should not ignore.

As well, while I love the target dividend of 6.25% dividend, I don’t know how much room that leaves for growth...

If you’re considering Pattern as a potential investment, I wouldn’t expect much in the way of dividend growth in 2014.

Greenbriar Capital Corp. (TSX-V: GRB)

Last year, we closed out a position in Western Wind Energy Corporation (TSX-V: WND) with a 33.3% gain. We actually closed it out because a company called Brookfield Renewable Energy Partners ended up acquiring this very successful wind farm developer.

Now those of you who know me know that I'm not much of a fan of generic wind energy stocks — but I do love a quality power generation play, whether its wind, solar, gas, or coal...

And this is exactly what WND was: a quality power generation play.

We originally picked up WND because it had zero debt, very lucrative power purchase agreements in place with the major utilities, and a management team that is probably one of the best I've ever seen in the energy space.

In fact, this company, which was started with only a few hundred thousand dollars, became a multi-million-dollar operation that grew its share price, on average, 20% each and every year since 2000. Only a top-notch management team can make something like this happen, particularly in the highly competitive and often times uncertain wind energy space.

So when I heard that the former CEO of WND had launched a new venture, I immediately got him on the phone... and I'm glad I did.

His name is Jeff Ciachurski, and he's one of the smartest and most aggressive CEOs I've ever met. Following his departure from WND, he immediately seized his next operation, another power development company that's jumping on a wealth of new solar and wind opportunities.

Now, I know some of you are either unfamiliar with or are simply uninterested in solar and wind plays. But the bottom line is that Ciachurski is one of the only guys I know who consistently makes money in this space. And it is for that reason that I'm bullish on this one.

The company is called Greenbriar Capital Corp. (TSX-V: GRB) (PINK SHEETS: GEBRF), and in the short time since Ciachurski moved from WND to GRB, the company has already announced a 100-MW solar deal in Puerto Rico and an 80-MW wind project in Utah.

When first considering GRB's operations, it looked like just another version of WND — which, quite frankly, would be enough of a reason for me to buy some. My hunch was confirmed last summer after Ciachurski admitted that GRB is, in fact, a continuation of a strategy he had with Western Wind.

But this one ups the ante.

GRB only has a small amount of outstanding shares, about 11 million. And about 6 million are held by insiders. Compare that to Western Wind, a highly successful and profitable stock, that had about 71 million outstanding shares. As Ciachurski noted, with GRB you're not splitting the pie with as many people. I love that!

Long term, assuming this plays out the same way WND played out, this could easily be a $5 stock by the end of 2014.

Investors are always talking about getting in on the ground floor of something big... well, that's exactly what this opportunity is.

U.S. Geothermal (AMEX: HTM)

In the past, I've discussed a geothermal technology known as Enhanced Geothermal Systems (EGS).

EGS is the holy grail for the geothermal industry. It's basically fracking for geothermal. But because you're simply talking about heat with EGS — and not a dedicated spot holding a finite resource — geothermal power plants can be set up practically anywhere.

You can't do that with wind or nuclear.

And the best part is that with EGS, you can produce electricity more cheaply than nearly anything else produced today.

On top of that, this resource is nearly exhaustible. In fact, an MIT report found that accessible geothermal resources in the United States are 130,000 times greater than the country's total annual energy consumption.

We learned this year that the first demonstration EGS projects actually sent juice to the grid. The development on EGS has been slow, but it's also been steady.

One of the earliest companies involved in EGS testing was U.S. Geothermal (AMEX: HTM).

If you're familiar with some of my past recommendations, HTM is a stock that I've played on numerous occasions. Our early coverage resulted in gains well over 200%, and over the years we've issued continued coverage — in both good times and bad.

I did actually jump out of the geothermal space for a bit, but I'm now back in... and once again, it's with U.S. Geothermal.

U.S. Geothermal is a geothermal power producer that operates three geothermal power plants in the U.S. and is currently developing a new project in Guatemala.

EBITDA for the first six months of 2013 was $5.18 million, compared to -$2.85 million one year prior. Net income for the first six months was $0.27 million, compared to a net loss of $4.24 million. Cash and cash equivalents for the first six months of 2013 increased $35.37 million, compared to an increase of $1.99 million one year prior.

Full-year 2013 guidance for operating revenues is between $25.9 million and $26.8 million, and EBITDA estimates are between $12.5 million and $13.7 million.

Overall, HTM is a high-risk, long-term play on geothermal in the United States (although the company is active outside the U.S., too). But after years of bouncing around, the stock is finally starting to stabilize, and the company is finally starting to show some success for its many years of hard work.

Bear in mind geothermal is one of the slowest growing sectors in the clean energy space. Take a look:


So don't expect the same kind of meteoric expansion we've witnessed in the solar and wind industries.

When it comes to this space, I think you get the most bang for your geothermal buck in 2014 with U.S. Geothermal.

New Solar IPO

SunEdison (NYSE: SUNE), formerly known as MEME Electronic Materials, announced this year that it would be splitting off its semiconductor business in a new IPO and use the proceeds to fund the construction of solar farms.

The stock soared more than 20% on the news before coming back down to reality, but such an IPO could turn out to be a big deal for solar investors...

The bottom line is that SUNE generates revenue through semiconductor and solar materials and project development. It's the latter that keeps the company in business.

In 2010, about 42% of revenues came from the company's semiconductor segment, and just under 24% came from project development. In 2012, project development boasted about 56% of revenues, while its semiconductor segment's contribution fell to 32%.

Also worth noting is that in 2010, solar materials accounted for about 35% of revenues. That figure fell to less than 12% in 2012.

Earlier this year, SunEdison also bought a solar company called EchoFirst in an effort to expand further into the residential solar market.

This company actually offers combined solar electric and solar thermal leases for consumers. Essentially, this allows the consumer to use solar not just for electricity, but for hot water, too.

This is a pretty big deal, as about 30% to 40% of average utility costs can come from hot water heaters.

We'll continue to follow the development of this IPO going forward.

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.

October 30, 2013

US Geothermal: A Knack For Hot Rocks

by Debra Fiakas CFA

San+Emidio[1].pngU.S. Geothermal (HTM:  AMEX) is scheduled to report third quarter 2013 financial results on November 15th, taking every day allowed to a public company to reveal the fruits and labors of a quarter.  There will be plenty to talk about in the conference call with analysts and investors.  USG closed a loan financing to support the first phase of its San Emidio geothermal power project in Nevada.  The loan valued at $30.7 million bears a fixed interest burden of 6.75% will replace a $25 million construction loan for the project and supply working capital for operation of San Emidio, shown right. 

There should be a few dollars left over from the October loan deal to use as seed capital to begin the second phase of the San Emidio project.  In early 2012, the company commissioned a 3.5 megawatt power plant, but intends to replace that with a more efficient 9 megawatt plant.  The company has already started drilling new production and injection wells and will upgrade transmission capacity as well.  Phase II is to start producing power by 2015.

Investors in alternative energy companies like USG are accustomed to hearing about plans for the future and power capacity at some time point ahead.  However, USG has more to offer investors that a lot of promises.  Sales in the twelve months ending June 2013 totaled $21.9 million and $2.0 million in operating cash flow.  That is a cash conversion rate of 9.1% for those who are keeping track.

The feat of positive cash generation is an important one.  USG has a history of red ink, burning plenty of cash to bring its three geothermal power plants online.  Besides San Emidio the company operates a plant at Raft River in southeastern Idaho and another at Neal Hot Springs in Oregon.  The company has two more leases in the San Emidio Desert in Nevada and owns a geothermal concession near Guatamala City in the Republic of Guatamala.  Expect more investments and the potential for operations to burn cash again in the future.

There are no consensus estimates published for U.S. Geothermal, but there are high hopes for the quarter report.  Message boards are filled with continuous chatter about the company’s progress.  Unfortunately, that has not translated to a higher valuation for HTM.  The stock has traded sideways for the last three months, after setting a 52-week high price of $0.61 in August and then falling off the June quarter results were published.  The March 2013 and December 2012 quarters had both been profitable and the net loss in the June 2013 quarter was unsettling.  I am always more concerned about operating cash flow in a growing company like Geothermal.  Cash flow from operations was likewise lower sequentially, but still positive.

Profits or losses.  Cash use or generation.  As far as valuation is concerned it might not matter.  At less than two bits per share the stock is priced very like at option on the company’s geothermal assets and management’s ability to turn hot rocks into a power source.  With a third geothermal plant now completed and operating and long-term financing in place, it seems clear management has got the knack for it. 

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

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

October 28, 2013

Ormat: Cash Generation Justifies Earnings Multiple

Ormat Heat exchanger at GKW Landau. Geothermal water evaporates the carrier medium. Preheater and the evaporator. The steam line above connects to the turbine.
Photo by Claus Ableiter via Wikimedia Commons

by Debra Fiakas CFA

Shares of geothermal power producer Ormat Technologies (ORA:  NYSE) are trading at 29.2 times the 2014 consensus estimate of $0.93 per share.  That multiple looks fair compared to growth expected at Ormat in the next year, but more dear against the company’s long-term growth prospects.  The stock has been flying off recent project developments. 

In early September this year, the company completed construction and commissioning of a 100 megawatt geothermal plant in New Zealand, making it the world’s largest geothermal power plant of its kind.  Straight off the job in New Zealand Ormat entered into a joint agreement with eBay (EBAY:  Nasdaq) for the development of a five megawatt recovered energy generation plant to supply power to eBay’s data center in Salt Lake City.  Just two weeks ago Ormat also signed a second agreement to develop a 60 megawatt geothermal project in Indonesia.

Ormat delivered $539 million in total revenue in the past twelve months. Unfortunately, the net result was a deep loss of $205.6 million or $4.47 per share.  Ormat recorded an impairment charge of $263.4 million related to its North Brawley power plant located in Imperial County, California.  The impairment charge was taken after the company made a decision to operate the power plant below maximum capacity.

Beyond the impairment charge Ormat has been a consistently profitable company.  Cash flow from operations totaled $323.6 million in the last three fiscal years, representing conversion of 24.4% of sales to cash.  In my view, impressive cash generation helps justify the forward earnings multiple.

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.

Sunny Climate For Solar Income Up North

Tom Konrad CFA

Solar investment ratios with incentives

Disclosure: I am long PW and HASI.

In a rational world, the sunniest places would have the warmest reception for solar technology and investment.  While solar is having its day in the sun in Hawaii, state incentives make the economics of photovolatics equally attractive in Vermont, a state not known for its sunny skies.  And while California is famous for its rapid deployment of solar, the economics are at least as good in Washington state, New York, New Hampshire, and chilly Maine.

It’s not only the economics of solar which can counter-intuitively get better to the North.  There are also some unique opportunities for small investors to finance of solar projects.  Last year, I wrote about attempts to allow US retail investors to invest in solar projects through Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs).  Solar REITs would require a ruling from the IRS, which now looks unlikely, while Solar MLPs would require an act of Congress… a Congress that can’t even keep the government open for business, let alone enact useful legislation.

Innovations in Solar Infrastructure Investment

While Congress fails to act, financial innovators are moving forward.  I’ve previously written about Solar Mosaic, Power REIT (NYSE:PW), and Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

Solar Mosaic offers small investors the opportunity to participate in loans directly, but the number of opportunities has so far been limited.  The interest on offer (4.5%) is attractive compared to many fixed income investments.  Unfortunately, Mosaic investments don’t allow the freedom to sell which investors can get with ordinary bonds or CDs, and are not available in tax-advantaged retirement accounts.

Power REIT is investing in the land under solar projects, but is in the middle of a civil case with Norfolk Southern (NYSE:NSC) and Wheeling & Lake Erie.  Resolution of this civil action has the potential to easily more than double the value of PW stock with (in my opinion) very little downside risk, but the associated expenses have forced Power REIT to temporarily suspend its dividend.  When the case is resolved and the dividend resumed, I expect Power REIT to become an attractive solar income investment.  Until then, I still consider it an attractive investment on the basis of the huge potential upside from the civil case, but it is not an income investment.

In contrast, I am very enthusiastic about Hannon Armstrong as a green income investment.  I’m confident that the company will be able to increase its dividend to $0.93 or more per year over the next two to three quarters, which will translate into an 8.2% yield at the current price of $11.32.  But HASI is an investment in sustainable infrastructure (mostly energy efficiency), as opposed to solar.

Two other clean energy income investments have gone public in the US are Pattern Energy Group (NASD:PEGI) and NRG Yield (NYSE:NYLD).  Both invest in clean energy infrastructure but only have minor investments in solar.  Pattern Energy plans to pay an initial $1.25 annual dividend, or 5.5% at the current price of $22.63 per share.  NRG Yield is expected to pay an annual dividend of $1.20 per share  initially and hopes to ramp that up to $1.44 per share by the end of 2014, corresponding to dividend yields of 3.9% and 4.7% at the current price of $30.58.  I have not evaluated either of these companies in depth, but plan to do so soon.


In many ways, our Canadian friends to the North are as far ahead of us in creating a sunny climate for solar income investment as Vermont is ahead of Florida in creating a sunny climate for solar installations.  CleanREIT Partners, LLC is a specialty finance/management company investing in solar installations and based in California, but planning an initial public offering on a Canadian exchange to allow investors to take advantage of a structure called a foreign asset income trust.  I recently spoke to Bill Hillard, co-founder of CleanREIT, and asked him what made him consider Canada.

I expected him to cite the tax advantages of Canadian foreign asset income trusts.  Like US REITs, such trusts are not subject to income tax at the corporate level, but instead Hillard cited the large number of comparable renewable energy income investments already trading in Canada.  (I wrote about six of these, and selected the one I consider most attractive here.  Not only are there more than on US exchanges, but the yields on offer are typically higher.)  According to Hillard, solar’s existing tax advantages should be sufficient to shelter the income from solar investments to the extent that legislation such as the MLP Parity Act would not be necessary to create a US-listed solar investment vehicle which would not be subject to tax at the corporate level.

For investment bankers who would be underwriting the offering, having comparable companies already trading on the same exchange makes it much easier to price the offering.  In the end, if a company can’t find an investment banker willing to take it public, there will be no IPO.

Canadian Foreign Asset Income Trusts

In addition to the advantage of having numerous comparable stocks in Canada, the Canadian foreign asset income trust seems likely to prove a compelling structure for companies investing in US-based energy assets.  Several companies investing in conventional energy have already gone public using this structure, including The Eagle Energy Trust (TSX:EGL.UN), The Parallel Energy Trust (TSX:PLT.UN), and the Argent Energy Trust (TSX:AET.UN), which have investments in oil and gas wells mostly in Texas to avoid state level taxes.

The foreign asset income trust arose out of an exception in Canada’s 2007 “SIFT” rules which required Canadian income trusts to begin paying corporate tax on Canadian assets.  The purpose of these rules was to reverse the hollowing out of Canada’s tax base.  This hollowing out was the result of Canadian corporations converting to trust structures, which had only been subject to tax at the investor level, and not the corporate level at the time.  Because the SIFT rules were narrowly designed to prevent the loss of tax on Canadian corporate assets, they left in place the ability of a trust to avoid Canadian corporate income tax on foreign corporate assets.  This income would only be taxable to investors, not the corporation.

According to Hillard, income distributed to US investors in a carefully managed Canadian solar foreign asset income trust should also be tax-free because of the income tax shelter afforded by accelerated depreciation.  To his (and my) surprise, many large investors he has been speaking with seem more interested in this ability to avoid tax at all levels than the actual income on offer.

That said, the yield should also be attractive.  The distributed-scale, operating  solar projects the CleanREIT team has identified produce a 9% to 10% unlevered cash yield, according to company documents Hillard shared with me.  They expect to be able to grow income over time as rising interest rates and higher electricity prices increase the income on solar projects.  They also expect that solar technology efficiency gains will create investment opportunities to generate more revenue per square foot by upgrading existing solar plants as they age.  At the retail investor level, they expect this strategy to result in a 7% dividend yield plus growth in equity over time.

CleanREIT could IPO as soon as 2014 given sufficient capital from outside investors to consummate pre-IPO solar purchases and continued attractive conditions in public markets.

Bottom Line

Although a handful of clean energy income investments are  now available in the US, American investors would do well by considering Canadian stocks.  The existence of numerous comparable companies, favorable tax structures, and higher yields look likely to keep the Toronto Stock Exchange an attractive venue for both clean energy investors and financiers for years to come.  If CleanREIT successfully executes on its plan to IPO as a high-yield, tax-free, distributed solar investment, Canada will be virtually irresistible to American sun-seeking investors.

This article was first published on the author's Forbes.com blog, Green Stocks on October 18th.

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.

October 26, 2013

Bunge: Now Less Sugar

Jim Lane

In New York, in the wake of a $37 million Q1 loss in its sugar unit, Bunge [BG] CEO Soren Schroder, who took the reins of the company in June, announced yesterday that the trading giant is commencing what he termed a “thoughtful comprehensive review” for its sugar business, including a potential sale of all the assets.

The company, which announced a $137 million overall quarterly loss, after posting a Q4 loss of $599 million in June. The Q4 loss included write-downs and charges of $683 million, including a $327 million write-down in its sugar and bioenergy unit.

Bunge’s sugar woes

The cause of the troubles? After buying five sugar mills in 2006 and entering the sugar business in 2006, Bunge has struggled along with the entire sector in the face of low sugar prices, which declined to a low of 16 cents a pound (the May 2014 NYMEX sugar contract has since recovered to $0.183, but apparently not enough to convince Schroder of the long-term opportunities in sugar. The sugar business had swung into losses starting with the forth quarter, losing $49 million in the face of falling ethanol and sugar prices.

Bunge's Moema
sugar mill

Bunge’s Moema sugar mill

The improvement in this quarter was slight and, though Bunge projected a profit in 2014, it described its $8-$10 per tonne profit target as “difficult.”

Brazil-wide output troubles

In addition to price troubles, the sector has been hit with poor cane yields — with Bunge finance director Drew Burke, the Bunge finance director noting that “Last year’s average ATR [cane sugar concentration] was near historic lows and this year it is expected to be below that level,” and indicated that delays in the harvest would also provide challenges in terms of getting all the cane off the fields.

According to a Reuters report, sugar output in Brazil has already been trimmed nearly five percent from a high of 690 million tonnes, as some 40 smaller mills have been forced to shut down, or have been consolidated into larger operations.

The shift from sugar? What does it mean for partners like Solazyme and Cobalt

The company did not discuss its new directions in detail as it announced its quarterly results — except to say that it had not had specific discussions with any buyers. Speculation from observers ranging from outright sale of the entire unit. to a sale of selected assets as Bunge reduces exposure, to the shutdown of capacity to stem the flow of losses.

The announcement puts more strategic light on Brazil for advanced biofuels — which is recent years has been considered a haven for potential collaboration between US technologies and Brazilian producers — but often finding deployment challenges as both early-stage advanced technology developers, as well as cash-strapped Brazilian operations — struggled to form capital for large-scale deployments of new technology.

One bright spot, to date, has been the sustained entry of Bunge into the sugar business — and especially its plans to add advanced biofuels and especially high-value chemicals and tailored oils into its product mix.

Bunge and Solazyme [SZYM]


This past summer, Solazyme and Bunge broke ground on a their 100,000 metric ton renewable oil production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. Construction started on schedule and the plant is targeted to be operational in the fourth quarter of 2013. It will service the renewable chemical and fuel industries within the Brazilian marketplace and will initially target 100,000 metric tons per year of renewable oil production.

A new Bunge agreement signed at the end of last year will expand the joint venture-owned oil production capacity at Solazyme Bunge Renewable Oils from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide.

In a recent quarterly report, Bunge posted $2.395 billion in edible oils sales, representing 1.692 million tons of product sold at $1,415 per metric ton. In that context, this deal represents $424 million in potential revenues at current prices, using the average edible oils prices that Bunge is currently generating.

Bunge and Cobalt

Last October, Bunge’s innovation arm invested an undisclosed amount in the Series E funding round for California-based Cobalt Technologies and Bunge aid at the time that it anticipates introducing the biobutanol technology in its sugarcane mills. The companies are working Rhodia to produce n-butanol from bagasse at a pilot facility in Campinas.

Last summer, Cobalt Technologies and Rhodia announced they would begin joint development and operation of a biobutanol demonstration facility in Brazil. The Cobalt/Rhodia plant is planned to utilize sugarcane bagasse to make n-butanol; bagasse is used at sugar mills to provide process energy to drive the mill and to supply power to the local grid; the Cobalt project will utilize that fraction of the bagasse that generates power for the grid, or any residual biomass that is burned as waste.

Work was scheduled to begin in August 2012 and move to a mill site in early 2013 for integration testing. Operational testing at the demonstration plant was expected to be completed by mid-2013. The exact production capacity of the plant was not disclosed.

Not exactly a fire sale

Bunge bought the assets for $1.5 billion and CEO Schroeder said that the had a “replacement value” today of $3 billion — which indicates that the company is not exactly in a “desperate to sell at any price” mode at this time. At the same time, despite the losses, Bunge stock has been riding high, with shares recovering from a low of $69.00 in June to reach $80.11 in yesterday’s trading.

Support from the Brazilian government

This year, substantially good news came from the Brazilian government when it announced that it plans to invest $2.85 billion in renewable energy and biofuel technology research. The funds were specially pointed towards support for companies like Bunge Ltd. and Petroleo Brasileiro SA to develop high-margin chemicals and increase ethanol output. Brazil is seeking to be a leader in next generation biofuels development after a decade of underinvestment in research.

Expanding in soy, biodiesel

At the same time that its sugar and ethanol operations are in doubt, Bunge is still growing its biodiesel unit in Brazil. In March, Bunge inaugurated its new biodiesel factory in Nova Mutum, Mato Grasso, which has a capacity of nearly 110,000 gallons of biodiesel per day from soy, or 40 million gallons per year.

The bottom line

In hindsight, you can see the overall wisdom of Bunge’s strategy in advanced biofuels.

The Solazyme relationship — not to mention the stake in Cobalt — had taken Bunge from a typical Brazilian sugarcane ethanol play to a unique and dynamic venturist looking to connect its sugar and oil trading operations, through biotech that converts low-cost, renewable sugars into tailored, high-value renewable oils.

Will Bunge, in fact, hold on, in time reap the benefit from its substantial investments of time and money? We suspect they will – not only because of the company’s confidence in its strategy, but because it may be hard to find suitors for all these assets at one time, and with its advanced bioenergy investments at such a critical juncture.

If Bunge unloads assets, it may find reasons to hang on to Moema and at least one other plant, to reap the benefits of the connection between low-cost sugar and high-priced oils that it has sought.

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

October 25, 2013

Offshore Wind Investment Opportunities

By Harris Roen

A significant alternative energy investment theme with potential for growth over the next few years is offshore wind. This article looks at the promise of marine based wind, potential pitfalls, and names three investments that could benefit from large-scale offshore wind development that is likely coming.

The Potential of Offshore Wind

Wind_map_small[1].jpg In 2011, the U.S. Department of Energy and the U.S. Department of Interior jointly published a national offshore wind strategy. According to the report, in areas with less than 100 feet of water the generating potential of offshore wind equals the entire generating capacity of the current U.S. electric system. If you include all of the potential offshore wind capacity, marine-based windmills could generate four times the current U.S. electrical demand!

A big plus is that some of the best offshore wind sites are near major population centers of New England, the mid-Atlantic, Gulf of Mexico and mid-Pacific coasts. The strategy estimates a deployable offshore resource that could generate 10 gigawatts of electricity in less than 10 years, at a cost of $0.10/kWh. This projection increases five-fold by 2020, to 54 gigawatts generated at $0.07/kWh. This would make offshore wind very competitive with both fossil fuel and renewable based generators.

So far, there have been two successful auctions of offshore wind leases in the U.S.—in Virginia and Rhode Island. Together, these auctions have generated $5.4 million by the Bureau of Ocean Energy Management (BOEM), leasing out 277,369 acres that could generate gigawatts of clean power. The fact that these two auctions generated positive action is a very good sign. Accordingly, BOEM plans to auction off leases in New Jersey, Maryland and Massachusetts in 2014.

Offshore Wind Challenges

Pun intended, but there are some significant headwinds to successfully executing offshore wind in the U.S. and abroad. The farther off the coast you go, the stronger the wind speeds. However, this means deeper depths, which increases technical challenges. Even at a large scale, offshore wind costs more to build and maintain than its land-based counterpart.

Another limiting factor pointed out by PennEnergy Research is the shortage of suitable operation and maintenance vessels. In order to tug large payloads, secure offshore towers, lay cables and the like, you need costly specialty ships. The competition for these ships is especially acute because of the increase in new offshore oil and gas fields. Oil and gas can offer better prices to gain access to this limited specialized fleet.

Another concern is that federal tax credits favorable to wind are set to expire at the end of 2013. Though there is a real risk that these credits will dry up, I believe there is a good chance the tax credits will be extended. Developing domestic sources of clean energy is a white-hat issue for both parties. Even during the fierce budget battles at the tail end of the Great Recession of 2012, congress had the votes to extend the credit.

Offshore Wind Investment Strategies

Two companies and an Exchange Traded Funds (ETF) are worth a look at as investments in offshore wind. Keep an eye on price, though, given the current frothy condition of the market.

ABB Ltd. (ABB) is a Swiss company whose products and services include power transmission, distribution and power-plant automation. Its systems are key in addressing the challenges of constructing, transporting and connecting large, distant offshore wind platforms. As a result, ABB recently secured a large offshore wind order. ABB has solid earnings and growing annual sales, but looks overvalued at current trading levels in the mid 20s. This stock looks more like a buy in the mid to high teens.

Parker-Hannifin (PH) is a large, diversified industrial manufacturing company that has a wide array of products. Of interest here is that Parker-Hannifin is a key supplier of underwater high-voltage power cables. We believe it is well positioned to take advantage of the growth of offshore wind with its subsea power cables. This well run, profitable company has excellent cash flow, but seems overpriced at current trading levels. The stock would look more interesting if it traded back down in the low to mid 80s.

Since there are very few publically traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in an alternative energy ETF. A good wind-oriented ETF is First Trust ISE Global Wind Energy Index Fund (FAN). Compared to other alternative energy ETFs, this fund has a relative low expense ratio and management fee structure. On the other hand, FAN has a high potential capital gains exposure. Though this fund has been beat up in the past, it has posted an astounding 74% return in the past 12 months.


Even though the price of solar photovoltaics continues to drop dramatically, wind power is still one of the most economical forms of clean energy. Though offshore wind is much more expensive to develop than its onshore cousin, the potential for large amount of steady generation cannot be ignored. The long-term clean energy investor would be wise to have a strategic position in this sector.


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

About the author

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

October 24, 2013

6 Reasons Why Stock Markets Are No Longer Fit For Purpose

A new investment architecture is set to emerge

By John Fullerton and Tim MacDonald

Stock markets are not as portrayed on TV, the nerve center of capitalism.  Stock markets are nothing more than tools to facilitate the exchange of stock certificates that represent contractual rights that have little to do with real ownership. Today’s stock markets are primarily about speculating on the future prices of stock certificates; they are largely disconnected from real investment or what goes on in the real economy of goods and services.  It’s time for real investors such as pension funds and endowments to reconnect with business enterprise in long-term relationship through a new investment architecture:  the Evergreen Direct Investing (“EDI”) method.

Stock exchanges were originally conceived for the public interest and had a clear public purpose:  to allow companies to raise equity from a large pool of investors and to provide a market for investors to later sell their shares in those companies.  The promise of a liquid secondary market lowered the cost of that equity to enterprise thereby increasing economic growth and, theoretically at least, shared prosperity.

But capital formation is only a small part of what happens on stock markets today.  Yes, successful stock offerings provide the avenue for venture capitalists to recycle investments made in private markets back into new, innovative young enterprises.  But it is short-term speculation in stocks, aided by the increased speed of information flow, that has grown like a cancer into a big business of little real value and now dominates stock market activity. 

Keynes quote

Too-big-to-fail bank (and whale-scale speculator) CEO Jamie Dimon extols liquid capital markets as one of America’s greatest strengths in his latest letter to shareholders.  But many who sing the praises of market liquidity are more often than not just self-interested speculators.   Indeed, recent history has shown that our world leading liquid markets are as well the source of extreme global instability with dire and ongoing consequences.  Nonetheless this trader ideology remains stubbornly at the heart of our short-term-obsessed finance capitalism which, left unchecked, surely will lead us to economic, social, and ecological collapse.  

Six reasons combine to make our equity capital markets no longer fit for purpose:

  • The privatization of stock exchanges, destroying their public purpose mandate and instead making the growth of trading volume their single-minded goal and high-frequency traders (computers programed to trade) their preferred customers;
  • The unrestrained technology arms race in computing power combined with the adoption of technology-driven information flow spurring the rapid acceleration of trading volume, which at critical times can be highly destabilizing;
  • The misguided ascent of “shareholder wealth maximization” (at the expense of all other stakeholder interests) in our business schools, board rooms, and the corporate finance departments on Wall Street;
  • The well-intended but equally misguided practice of using stock-based incentives, and stock options in particular, as the dominant form of senior management compensation, which incentivizes them to focus only on short-term results at the expense of the long-term health of the enterprise, people and planet;
  • The misalignment of interests between short-term focused Wall Street intermediaries and real investors such as pension funds whose timeframe should be measured in decades;
  • Regulators’ lack of courage and confidence to counter the trader-driven paradigm and institute substantive structural reform such as a Financial Transactions Tax and other reforms that would penalize excessive speculation while incenting long-term productive investment.

Rather than limit themselves to this deeply flawed system, real investors can build direct relationships with enterprise in negotiated, innovative, mutually beneficial partnerships that are truly aligned with both parties’ long-term goals including the harmonization of financial, environmental, social, and governance imperatives.

The Evergreen Direct Investing Method

Private direct investment in enterprise (in contrast with trading in the stock market) with a long investment horizon, even an “evergreen” horizon, is nothing new.  As described in detail in Capital Institute’s fifth installment of its “Field Guide to Investing in a Regenerative Economy,” the EDI method enables long-term investors like pension funds to share in the cash flows of mature stable businesses.  Financial returns are earned through these planned cash distributions rather than through a hoped-for sale of the stock at a higher price than originally purchased. Stakeholder interests can be truly aligned, with environmental and social, and governance values negotiated into the partnership up front.

Buffett Quote

EDI investors will want to target mature, stable, low-growth businesses, often unappreciated by growth-obsessed equity capital markets.  They will thus disprove the myth that growth at the expense of the environment or employees is the only path to adequate financial returns.  The cash flows of mature, stable businesses may not exhibit the (in our view often unsustainable) growth characteristics equity investors have been trained to desire, but they are far more dependable sources of financial return than speculation-driven capital markets.  That resiliency is what stewardship investors will value most in an increasingly uncertain future with growing resource and fiscal constraints hampering economic growth, particularly in the developed economies.

In fact, investing in mature, low growth sectors in which companies pay out rather than retain most of the cash flow they generate (energy infrastructure MLPs, REITs, utilities) is a proven formula for dependable, long-term investment success as the table below reveals:  

While the EDI method involves taking businesses or subsidiaries of public companies private, its returns to the investor are not conditional on sales.  It thus differs significantly in approach and intention from conventional highly leveraged and therefore less resilient, exit-driven private equity with its excessive fees.

Can EDI be scaled up as an alternative vehicle for investment in large, mature businesses of the mainstream developed economies, while also providing a more effective way to embed ESG values into their investments and the economy in aggregate?  It will require a fresh look with a critical eye at the failed promise of modern portfolio theory, and the self-serving interests of our short-term-driven Wall Street trading paradigm.

This is the great promise of Evergreen Direct Investing.

Earlier versions of this post previously ran on The Guardian's Sustainable Business Blog and on Capital Institute's Future of Finance Blog."

John Fullerton is the founder and president of Capital Institute, and a recognized New Economy thought leader. He is also a leading practitioner of "impact investment" as the principal of Level 3 Capital Advisors, LLC.  He was previously a Managing Director of JPMorgan, where he worked for over 18 years.
Tim MacDonald, Capital Institute Senior Fellow, is a theorist-practitioner in the evolving new field of purposeful investment by stewardship investors, and the principal architect of the Evergreen Direct Investing method.  He was previously a tax partnership lawyer.

October 23, 2013

Broadwind: Optimism In The Wind

by Debra Fiakas CFA

  In early October 2013, Broadwind (BWEN:  Nasdaq) announced over $100 million in new wind tower orders, tipping the value of orders received in the year 2013 over the $300 million mark.   Wind energy has been a fickle market to pursue, alternatively showing great promise as policy makers show support for renewable energy sources and then sinking as cheap natural gas substitutes flood the market.

Broadwind’s expertise is in gearing of various kinds.  In addition to supplying gearboxes for wind turbines, the company offers maintenance services to tower owners.  Oil in gearboxes must be changed regularly and wind blades must be checked and replaced regularly.  The company applies its experience in steel fabrication to more than just wind towers.  Broadwind also builds large, complex fabricated steel structures for use in the aerospace and automotive industries, including crane masts, booms, and engine frames.
Revenue has been building back up since the 2009-2010 recession, but Broadwind has yet to report a net profit.  The net loss in the most recently reported twelve months was $14.8 million on $197 million in total sales.  What is even more concerning is that the company has burned a fair amount of cash to keep operations going  -  $23.2 million over the last three fiscal years alone.  However, in the most recent twelve months the company managed to reverse the cash drain, generating a net $13.6 million in cash from operations.
Cash on the balance sheet at the end of June 2013 was $17.9 million  -  about enough to keep Broadwind going for a while even if it cannot maintain positive cash flow.  There is $4.3 million in debt on the balance sheet, well within reason to pay off with current cash resources.

There appears to be some optimism that better times are ahead for Broadwind.  There are only two analysts with published earnings estimates for Broadwind.  They appear to be in agreement on the potential for profitability in 2014.  The consensus estimate is $0.15 in earnings per share in 2014 on $267.5 million in total sales.

BWEN is trading at 66.0 times forward earnings (2014).  That might seem dear, but this and next year are still transition years for Broadwind.  The shares have built up considerable momentum in recent weeks, after languishing for some time under the $5.00 price level.  The stock seems poised to grow into its valuation.

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

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

October 21, 2013

Did You Catch Kaydon In Time?

by Debra Fiakas CFA

KaydonID[1].gif Most investors with an interest in the alternative energy industry think first of the energy source  -  solar, wind, geothermal or biofuel.  There are other roads to access the returns promised by the shift from fossil fuel to alternative sources.  But do not waste time as these gems are in the sights of strategic buyers as well.

Kaydon Corporation (KDN:  NYSE) produces components and sub-systems used in the alternative energy industry.  Its friction control products are critical for the efficient operation of wind turbines and blades.  These products include large diameter turntable bearings and specialty balls.  The company also makes fuel cleansing systems and air filtration systems.  The company reported $55.4 million in sales to customers in the wind energy sector in 2012, in-line with 2011 sales of $54.3 million but well off the sales levels in the previous years  -  $103.0 million in 2009 and $95.9 million in 2010.  Despite the drop in sales to the wind energy sector, it still represented a solid 12% of total sales. 

The friction control segment represents over half of Kaydon’s total sales, which were $462.4 million in the most recently reported twelve months.  Kaydon has been consistently profitable over the years, but took a non-cash charge of $46.3 million in 2012 to write-down the value of its wind energy production equipment.  The impairment charge was triggered by a restructuring of the company’s wind energy business line.  The restructure was needed to bring the business in line with the reduced pace of growth in the wind segment.

The impairment charge in third quarter 2012 resulted in a deep loss for the quarter.  While the price/earnings multiple for KDN is negative, operating cash flow is another story.  In the most recently reported twelve months Kaydon turned 24% of sales into cash.  Indeed, Kaydon distributed $367.9 million in dividends in 2012.   The stock had been trading below ten times trailing cash flow from operations.  If you did not see this as a bargain you are now too late.  The strong cash flows were probably one of the attractive elements that brought SKF Group of Sweden to make a $35.50 cash tender offer for Kaydon shares that closed October 16th.

SKF Group is a worldwide supplier of bearings that has built a network of over 15,000 distribution centers for its bearing products as well as maintenance and engineering services.  Tucked  into SKF, Kaydon will probably lose its alternative energy character.  Just the same, the suppliers behind the scenes remain a smart way to play the transforming energy sector.

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

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

October 20, 2013

SolarCity: The Amazon of Solar?

By Harris Roen

SolarCity (NASD:SCTY) has become a sort of proxy for the future of solar in this country. This tremendously successful company is coming up on a one year anniversary of its IPO in December. Several developments at SolarCity warrant a closer look into this dynamic company trying to stay ahead of the curve in a growing, competitive solar installation environment.


Despite skeptics, SolarCity’s stock is strong

There was much skepticism among investors when SolarCity was preparing for its IPO in 2012. Solar stocks had been badly beaten up in recent years – the Ardour Solar Energy Index (SOLRX) had fallen fully 97% from its highs at the beginning of 2008 to its lows in November 2012. The reality for SolarCity, though, turned out to be much different.

Since SolarCity issued its stock on December 13, 2012, it has gained 466%! For the month of October alone SolarCity is up over 50%. Volume has steadily increased also. The one-month rolling average is at its highest level ever, and is double what it was just this past September.

 Solid third-quarter numbers, even better guidance

Last Friday SolarCity announced that it had deployed 78 megawatts of photovoltaics in the third quarter of 2013. That is greater than what was installed in all of 2011, and about 70% of all megawatts SolarCity installed in 2012. As well, the number of customers has more than doubled, from about 40,000 in 2012 to over 82,000 as of September 30. Not surprisingly, the stock jumped 23% in one day on the news.

SolarCity expects the number of megawatts installed to be 278 for 2013, and almost doubling to between 475 and 525 megawatts for 2014. Third quarter revenues will be announced on November 6, so look for my report on SolarCity’s financial results around that time.

 $345 million to be raised through stock offering and convertible note

On Tuesday, SolarCity rolled out a plan to raise hundreds of millions of dollars in new capital. Four large investment firms will be underwriting 3.4 million shares of common stock at $46.54/share. Additionally, SolarCity will offer over $200 million in convertible senior notes. The net proceeds from both are expected to reach $344.8 million, which is about 8% of its current market cap. If SolarCity can continue to use this capital to efficiently grow the company through marketing and finance options, then I see this as a very positive development.

Corporate acquisitions

Since September, SolarCity has made two large, strategic acquisitions. Earlier this month it acquired Zep Solar, a California-based photovoltaic mounting company. Zep Solar has been a component supplier to SolarCity, and its innovative “rail-free” panels makes for affordable and adaptable installs. This $158 million deal should add efficiencies to SolarCity’s bottom line.

In September, SolarCity closed on another significant deal, acquiring Paramount Solar for $120 million. Paramount Solar, formerly part of a highly regarded sales and marketing firm, should help put a professional edge on SolarCity’s public face. Since SolarCity is essentially trying to sell a complex material and financial product to a mass market, this will be a critical step to their ultimate success.

scty_cust_20131018[1].jpg What does it all mean?

There is no doubt that SolarCity is a speculative investment any way you slice it. It has yet to turn a profit, and consensus estimates are betting that it will still have negative earnings in 2014 and 2015. Given that, some of the most important numbers to watch are revenue per customer, and acquisition costs per customer.

Revenue per customer have become somewhat compressed since 2012, though are holding steady from the last quarter. Acquisition costs per customer, on the other hand, keep improving. It will be important to see at year’s end how the annual numbers compare with 2012 and 2011. This will say much about when SolarCity will hit scale and become a profitable company. In the mean time, the third quarter earnings report should be very revealing as to how these trends are starting to play out.

I feel SolarCity is in a similar position that Amazon was in about 10 years ago (despite the fact that they are extremely different companies at their core). Amazon had a CEO that frequently made the press, negative earnings as far as the eye could see, and a strange business model that seemed to only be interested in market share at any cost. Many skeptics (including myself at the time) could not justify Amazon as a viable investment. Those who did invest 10 years ago, though, made a handsome 18% annualized return on Amazon stock. I would not be surprised at all if 10 years from now SolarCity skeptics will also be proven wrong.


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

About the author

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

October 19, 2013

Price Pressure Will Squeeze Solar Inverter Revenues

James Montgomery

SMA Solar inverter photo by Claus Ableiter

In a new report, IHS says worldwide solar inverter unit shipments will rise 7 percent this year, but PV inverter revenues are heading the opposite way, a 9 percent decline this year to $6.4 billion, worse than the firm's earlier prediction of a 5 percent drop. (2014 will see a 9 percent rebound in revenues back to around $7.0 billion, while shipments will surge 19 percent to more than 41 GW.) That's because overall inverter prices are sinking fast, sliding to $0.18/W this year vs. $0.22/W in 2012. It's especially painful for big utility-scale projects; IHS says these will make up a third of global demand this year, up from 29 percent last year, but global prices for large central inverters will decrease 16 percent to $0.12/W.

One reason for the divergence is that solar PV technologies further up the supply chain — silicon, cells, and modules — have been bearing the brunt of the market's relentless cost-cutting demands, but now those pressures are moving further down the chain into the balance-of-system technologies, explained Cormac Gilligan, senior PV market analyst at IHS. Meanwhile, some of the larger established solar markets, especially in Europe, are slowing down dramatically, so an increasingly crowded market of inverter suppliers is fighting for less business. Favorite markets such as Germany and Italy also are reducing or eliminating subsidies, he pointed out, so project developers are submitting tenders at rock-bottom prices to win the business, which means they'll have to squeeze out even more costs.

Ironically, some of the emerging global solar markets are also ones where utility-scale solar is taking off, such as China, India, South America, and South Africa — and it's in these markets where pricing pressure can be most severe, with inverter prices as low as $0.06/W in China, India, and Thailand, IHS noted.

Gilligan said that makers of central inverters are trying to answer the market pressures by offering features that translate to some savings on the operations and maintenance side, such as higher input voltages (>1,000 V) and liquid cooling. Some inverter companies also are broadening their portfolios to include smaller three-phase inverters targeting more commercial-scale opportunities. China's still a relatively unique case where several domestic utility-scale inverter companies have held their turf, and western inverter suppliers are trying to get into the market, creating massive price pressure.

However, price pressures also are being felt for smaller three-phase inverters (20-35 kW) in utility and commercial applications, Gilligan pointed out. Some European markets will see prices for those lower-power inverters sinking 20 percent to $0.14/W. This is a growing sector in the U.S. for these types of inverters, he noted, predicting more than 200 MW of shipments this year, and pricing is still relatively higher than in Europe. But there's increasing competition too (he pointed to SMA Solar (SMTGF) and Power-One (PWER)) so look for prices to start declining as they have in Europe.

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.

October 18, 2013

China Recycling Energy: Profiting From Murky Air, But How Much?

by Debra Fiakas CFA

Shanghai at sunset as the sun fades into the smog.
Photo source: Suicup
China’s industrial pollution problems are mounting.  Global emissions of carbon dioxide (CO2) increased by 3% in 2011, reaching an all-time high of 34 billion tons.  China contributed a whopping 29% of that carbon dioxide  -  nearly twice that of the second worst polluter, the U.S., which spit out 5.4 million tons or 16% of the total CO2 emissions. 

Policy makers in China have been slow to move against industrial polluters out of concern for stalling economic growth the country badly needs to provide room and board for its 1.4 billion people.  Still there is a building waste reclamation and recycling sector.  One of the private sector leaders, China Recycling Energy Corp. is listed on Nasdaq under the symbol CREG after one of those reverse merger transactions that got so much attention a few years back.  The company designs, commissions and eventually sells waste processing and waste-to-energy systems to China’s industrial sector.

One of its newest partners is China Guangdong Nuclear Energy (CGN) located in the province of the same name.  The two have pledged to jointly construct waste-to-energy projects.  With financing resources getting tougher to come by in China, partnerships might be a smart way to keep the top-line growing.  In August 2013, China Recycling announced approval of a planned fund to invest in energy recovery and waste heat power generation projects.  Its partner in that effort is Hongyuan Huifu Venture Capital.
CREG shares might seem to be selling a bit dear at 18.2 times trailing earnings.  The company earned $0.14 per share on $29.0 million in total sales in the most recently reported twelve months.  Operating cash flow generation of $5.5 million or $0.11 is even less impressive.  China Recycling does not even have a clean balance sheet.  There is $63.2 million in debt outstanding  -  about equal to equity.
A premium valuation is all the more surprising given China’s reputation for cooked books and sham businesses.  I am still stinging over a fouled play on RINO International, an environmental clean-up operation that falsified contracts and revenue.  Earlier this year executives of that company  -  a husband and wife team  -  agreed to reimburse investors for funds $3.5 million taken from shareholders to pay for homes, cars and clothing.

As beguiling as environmental clean-up might be for the civic minded investor, before taking a position in China Recycling Energy investors need to look closely at corporate structure and audited financials.  Granted China Recycling is not a family operation like RINO International.  Its auditor, Goldman Kurland and Mohidin, is a member of the BDO Seidman Alliance and has bilingual auditors among its ranks.  Unfortunately, GKM partner Ahmed Mohidin was once employed by Kabani & Company, one of the U.S. auditing firms that has been suspected of passing over questionable financial records.

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

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

October 17, 2013

Shunfeng Could Be China's New Major Solar Player

Doug Young

China’s solar retrenchment has taken a big step forward with word that a bankruptcy court has chosen Hong Kong-listed Shunfeng Photovoltaic (HKEx: 1165) from a field of bidders vying to invest in reorganizing former solar pioneer Suntech (NYSE: STP). The decision is interesting both because of who the bankruptcy court selected, and also because of who lost the bidding. The selection of Shunfeng looks particularly significant, as it could mark the emergence of a new major player as the battered solar panel sector finally starts to emerge from its 2-year-old downturn.

The latest reports don’t contain too much information beyond the fact that Shunfeng was formally selected earlier this week to provide Suntech some of the key funding it will need to emerge from bankruptcy. (English article) Others who made it to the final round of bidding included GCL Poly-Energy (HKEx: 3800) and Wuxi Guolian, according to the reports. Earlier reports had indicated that 2 New York-listed Chinese manufacturers, Yingli (NYSE: YGE) and Trina (NYSE: TSL), were also interested in the bidding at one point..

Shunfeng’s Hong Kong-listed shares rallied nearly 50 percent in the 2 trading days this week after rumors first emerged that it was named as Suntech’s investor, though they gave back some of those gains in the latest session. Even after the rally, the company’s market value remains relatively small, at just under $1 billion. Rivals like Trina and Yingli were once worth much more at the height of enthusiasm about the future of solar power 3 years ago, but most are now valued at similar levels.

Shungfeng’s selection looks particularly noteworthy because the company is also part of a group that previously purchased 20 percent of LDK (NYSE: LDK), China’s other major struggling solar player, according to one of my sources. Whereas Suntech was formally forced into bankruptcy earlier this year after defaulting on more than $500 million in bonds, LDK has been slowly reorganizing outside bankruptcy court by selling off assets and selling shares to new investors.

Many solar shares have started to rally in the last few months as the sector’s outlook starts to improve, but Suntech and LDK shares have performed less well due to uncertainty surrounding the pair. A strong possibility is that shares for both companies could become worthless, or more likely that existing shareholders will be strongly diluted when each company issues more stock to new investors.

Shunfeng’s selection to invest in Suntech, combined with its existing investments in LDK, certainly make the company an interesting one to watch as the sector reorganizes. Prior to the downturn, Suntech was once China’s leading solar panel maker. Creative accounting and overly aggressive debt issuing ultimately led to its downfall, but the company still holds good manufacturing assets that could be quite valuable to a buyer. LDK faced similar issues with an overly heavy debt load, and is currently in talks with some of its bond holders after missing a recent interest payment. (company announcement)

All that said, this latest development looks potentially positive for Shunfeng, which could emerge as quite a strong player if it can take control of Suntech’s and LDK’s assets without the huge debt load held by each of those companies. Shunfeng could also face integration issues, as local governments would almost certainly resist any more major layoffs or facility closures at Suntech’s and LDK’s main facilities. At the end of the day, I would probably give Shunfeng a 50-50 chance of success if it can successfully take control of Suntech’s and LDK’s assets, producing a new big name to watch in the recovering sector.

Bottom line: Shunfeng could emerge as a major new player in China’s solar sector if it can successfully take control of and turn around assets from Suntech and LDK.

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

October 16, 2013

Six Weeks, Twelve Clean Energy Stocks

Tom Konrad CFA

It's been a busy six weeks since I last updated readers on the news events driving my Ten Clean Energy Stocks for 2013 and six alternative picks.  I looked into the performance of the portfolio as a whole at the start of the month, along with some comments about the four renewable energy developers.  I thought at the time we might be seeing a bottom for these beleaguered stocks, but if I was right, we have yet to see the upturn.  Nevertheless, the fundamental factors I discussed are still in place.

I've updated my regular chart of stock performance with intraday prices on October 15th to reflect the two weeks of changes since the performance update, and you can see it below.
10 for 13 ides of october.png
From a couple reader comments, I realize that not everyone understands how to read these charts, which are designed more for the compact display of a lot of information than for easy readability.  You will see bars above and/or below the axis for each stock, with different colors representing each time period or dividends for the year to date.  The total performance of the stock is the sum of the bars above the line, minus the bars below the line, and is represented by the green diamond "Total" and also labeled with the percentage gain or loss since the end of last year.

Stock Updates

All stock movements mentioned below refer to the six weeks since the last update on August 30th to intrad day prices on October 15th.  During that period my benchmarks IWM and PBW advanced 9% and 28%, respectively.

Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF)

Geothermal heat pump manufacturer Waterfurnace advanced 5% for a total gain this year of 26%.

Lime Energy (NASD:LIME)

Utility demand-side management contractor Lime Energy completed a seven-to-one reverse split and issuance of preferred stock necessary to maintain its NASDAQ listing.  With the additional $2.5 million in cash from the sale of convertible preferred shares, Lime should have enough cash to see it to profitability late this year or early next.

The company continues to be awarded significant contracts, such as the $22 million direct install contract from National Grid (NYSE:NGG) announced on September 20th.

Lime fell 22% for the period, after adjusting for the reverse split.  The preferred dividend payments are payable in additional preferred shares at the company's option at a rate of 12.5% per annum, and are convertible into common shares at a post-split conversion price of $3.87, a 17% premium to the current price of $3.23.

Until I see some more financial statements for this much changed company, I'll have trouble valuing it, but the replacement of most of its outstanding debt with preferred shares on which the dividends are payable with equity clears the way for Lime to achieve profitability in the next couple quarters.  I have not yet, but am seriously considering increasing my position.

The company is down 18% for the year.

PFB Corporation (TSX:PFB, OTC:PFBOF)

Green builder PFB fell 7% for the period, and has gained 8% for the year to date.

Ameresco, Inc. (NASD:AMRC)

Turnkey Energy Service Company (ESCO) Ameresco has recovered 18% on a growing backlog of business, and is now up 14% for the year.  Its combined contribution to the portfolio with Maxwell Technologies after it replaced the latter in the portfolio is -13% for the year.

Navigant research recently published a study of the US Energy Service Company (ESCO) market, which predicts strong year-over year growth in 2014, and 7.7% compound annual growth from 2013 to 2020.  This fits well with my belief that Ameresco is temporarily undervalued because of a weak ESCO market in 2012 and early 2013 resulting from the end of the 2009 stimulus. 

Strong growth in the ESCO market should also help Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), which arranges financing for and invests in ESCO projects. I expect the dividend to ramp up to over 8% over the next three quarters (based on the current stock price of $11.33) and the stock to appreciate as it does.

Accell Group (Amsterdam:ACCEL)

Bicycle manufacturer and distributor Accell Group gained 7% for the period and 18% for the year to date.  The company continues to reorganize its Dutch operations to better match costs to a sluggish local bicycle market.

Zoltek Companies (NASD:ZOLT)

Carbon fiber manufacturer Zoltek rose 38% for the period and 122% year to date after announcing an agreement with Japanese carbon fiber maker Toray Industries, Inc. (OTC:TRYIF) to purchase the company for $16.75 per share.

There was some speculation in September which temporarily caused the stock to shoot up over $19 on rumors of a $22 bid from Mitsubishi Heavy Industries. I thought the rumored price was much too high given that the group which had forced Zoltek to put itself up for sale, Quinparo Partners, had only been discussing making an offer "in the low teens," so I sold some $17.50 calls which I expect to expire worthless.

Kandi Technologies (NASD:KNDI)

Chinese EV and off road vehicle manufacturer Kandi Technologies climbed 88% for a total gain of 108% for the year on the renewal of Chinese EV subsidies in September.  I had re-purchased a trading stake in the $4 range which I sold in the low $7 range shortly after the subsidies were announced.  As the stock continued to climb into the $9 range, I sold some $10 calls, which I expect to hold until they expire in December.  Kandi is currently trading at $7.91.

Waste Management (NYSE:WM)

Waste Management is up 4% for the period and 28% for the year.

Six Alternative Clean Energy Stocks

New Flyer Industries (TSX:NFI, OTC:NFYEF)

Transit bus maker New Flyer lost 2% for the period and is up 25% for the year.  The company is integrating the parts businesses acquired from Orion and NABI, and expects strong growth as transit customers refurbish rapidly aging fleets.

This evening (Oct 15th) New Flyer announced its new orders and backlog for the third quarter.  Deliveries increased 49% year on year to 577 equivalent units (EU) (articulated buses count for two EUs) while adding significantly to its backlong with firm orders and options for a net 1,931 EUs, after the expiration of unexercised options.

LSB Industries (NYSE:LXU)

Chemicals and Climate control conglomerate LSB Industries advanced 9% for the period but is down 6% for the year.  The company had temporarily poor earnings in the first two quarters because of repairs and upgrades at two of its chemical plants, although its climate control business was strong.  I expect insurance recoveries and better capacity utilization will lead to much stronger results in Q3 and Q4, as well as next year.

Maxwell Technologies (NASD:MXWL)

Ultracapacitor maker Maxwell Technologies briefly rallied in September when analysts at Piper Jaffray got confused by the announcement of subsidies for Plug-in Hybrid (PHEV) buses in China (to which Maxwell has insignificant exposure,) and mistook them for the expected subsidies for hybrid (HEV) buses.  Since PHEVs are much more expensive than HEVs, the subsidies were much larger than the Piper Jaffray analysts expected, and they raised their price target from $8 to $13.50, only to drop it back to $8 the next day when they realized their mistake.

Readers of my blog were not fooled, but many traders were, and the stock shot up over $10 before Piper Jaffray reversed their mistake.

It is very hard to predict Chinese policy, but the fact that the expected HEV subsidies have not yet been announced should be worrying to Maxwell investors.  These subsidies were first expected months ago.  China's stated policy for the EV subsidies was to drive the development of new technology, as opposed to subsidizing the roll-out of established technology.  It's all about reading tea-leaves, but I'm beginning to think there is a real chance that subsidies for hybrid buses may not be renewed at all. 

If they are renewed, the lack of subsidies in the third quarter will mean that Maxwell's earnings (to be announced next week) are likely to be even worse than I thought a couple months ago, and the lack of subsidy renewal is now eating into fourth quarter earnings as well.  I've increased my short position based on this reasoning.

Maxwell lost 6% for the period but is up 2% for the year.


Railroad and solar Real Estate Investment Trust Power REIT received some subtle but positive results in their ongoing civil case to foreclose on their railroad lease with Norfolk Southern Corporation (NYSE:NSC) and its sub-lessee Wheeling and Lake Erie (WLE).  A new judge has replaced the previous judge in the civil action.  In his first ruling, this judge dismissed NSC and WLE's attempts to get much of the evidence excluded from the case in a long ruling detailing many flaws in their argument where a single-line ruling would have been sufficient.  I believe that the judge was sending them a message not to delay the case with frivolous arguments.  They seem to have gotten the memo, and refrained from another possible motion which had little chance of success, but would have delayed the case by 2-3 months.

Power REIT advanced 4% for the period but is down 14% year to date.


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.

October 15, 2013

The Ghost of Solyndra Haunts Chinese Solar Stocks

Doug Young

The solar sector’s slow recovery is receiving some new setbacks in the form of lawsuits by 2 bankrupt US companies against Yingli (NYSE: YGE), Trina (NYSE: TSL) and Suntech (NYSE: STP), the last of which is also in bankruptcy reorganization. Adding to the mess, Suntech has just disclosed that more of its European assets have been seized by the Italian courts, throwing yet another new complication into its ongoing reorganization. This growing tide of litigation is somewhat expected, as investors try to recover whatever money they can following the sector’s spectacular crash over the last two years. But such actions will only slow the sector’s broader recovery, and in some cases could remain as troublesome liabilities for companies for years to come.

Let’s start off this solar litigation roundup with a look at a series of lawsuits filed against Trina, Suntech and Yingli by 2 US companies, Solyndra and Energy Conversion Devices. (English article) Both Solyndra and Energy Conversion went bust during the sector’s 2-year-old downturn, and these new lawsuits are attempts by their creditors to recover whatever money they can. Both Trina and Yingli issued statements saying they believe the claims are groundless, and that the suits represent attempts by Solyndra and Energy Conversion Devices to to blame others for their own failures. (Yingli statement; Trina statement)

It’s impossible for me to give an informed view about the merit of the lawsuits since I’m unfamiliar with the technology involved. But I can say with certainty that these lawsuits will add unwanted legal costs and pose the threat of penalties over the next few years for Yingli, Trina and Suntech. That’s the last thing these companies need as they try to return to profitability after 2 years of big losses.

This isn’t the first time that Solyndra has caused headaches for the Chinese manufacturers. Industry watchers will recall that the US company’s original bankruptcy was the first event in a chain that ultimately ended with Washington slapping anti-dumping tariffs on Chinese-made solar panels earlier this year. So perhaps it’s appropriate that the ghost of Solyndra is coming back just one more time to cause headaches for these firms.

From these new lawsuits, let’s look quickly at the latest news from Suntech, which says courts in Italy have seized another 10 solar power plants owned by Global Solar Fund (GSF), a solar power plant builder controller by Suntech. Suntech reported last month that the Italian courts had seized 37 of GSF’s solar plants (previous post), and now the number has grown to 47. (company announcement) These new seizures mean GSF has now lost control of 27 percent of its assets, which prosecutors suspect of violating various environmental and authorization rules.

GSF was once one of the biggest buyers of Suntech’s panels, and has an enterprise value of about $800 million. Suntech creditors were hoping to sell GSF’s assets as part of Suntech’s reorganization, in a bid to get back some of their money. But the seizure of so many GSF assets, combined with the potential threat of additional seizures, means that GSF may be a difficult asset to liquidate anytime soon.

I’d previously guessed that a sale of all of GSF’s assets could have generated around $200 million in cash, far less than the company’s enterprise value, since many of its plants were built at the height of the solar boom when panels were still quite expensive. But these latest seizures mean that Suntech’s creditors won’t be able to recover any money from the sale of GSF assets anytime soon. That means negotiations for Suntech’s reorganization may have to be re-opened, further delaying its emergence from bankruptcy.

Bottom line: New US lawsuits against Chinese solar panel makers and the Italian court’s seizure of more Suntech assets reflect growing solar litigation likely to delay the sector’s recovery.

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

October 14, 2013

Green Plains, Green Profits

by Debra Fiakas CFA

Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) is one of the few U.S. ethanol producers to turn a consistent profit.  The company is half way through its fifth consecutive profitable year.  Sales in the most recently reported twelve months totaled $3.4 billion, on which the company earned $40.5 million in net income.  During this period Green Plains generated $100.0 million in operating cash flow.

Tracing Green Plains profits requires a bit of effort by investors.  The company channels its products through a marketing and distribution division.  Thus while, ethanol production represents about one-third of total revenue, it has reported significant operating losses.  Production losses are offset by profits in each of the other segments.  Corn oil production and agribusiness products such as distiller grains provide the majority of profits.

Green Plains operates nine ethanol plants with a total production capacity of 740 million gallons per year.  At a capacity the ethanol process Green Plains uses can generate up to 150 million pounds of corn oil and 2.1 million tons of distillers grains.  The company has built up through a combination of new construction and acquisitions.  We expect more of the same in the coming years. 

Green Plains has plenty of cash in the bank, especially after closing debt offering of $120 million last month.  We estimate Green Plains now has $320 million in cash on its balance sheet.  Some of that cash may be used to pay down higher coupon debt.  The new debt carries an interest burden of 3.12% compared to a coupon of 5.75% on the existing convertible senior notes.  Green Plains has a total of $518 million in debt, representing about 51% of the company’s total capital.

Even if some of the funds are diverted to debt pay-off, we expect management to look more seriously at investments for growth.  One of the company’s more interesting ventures is BioProcess Algae, which is developing technologies for growing and harvesting algal biomass.  Of course, additional ethanol production capacity and grain storage capacity are also on management’s wish list.

At the current price level GPRE is priced at 11.8 times forward earnings  -  no significant bargain compared to the trailing price earnings multiple of 12.5.  However, compared to the broader specialty chemical sector, GPRE is trading well below the average.

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

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

October 13, 2013

Canadian Solar Sells Four Plants, Looks Set to Return to Profitability

Doug Young

As the solar panel sector continues its painful overhaul, signals are emerging about who will survive the downturn and thrive when the industry returns to health. Canadian Solar (Nasdaq: CSIQ) certainly seems to be one of the strongest players coming out of the retrenchment, with word that the company has sold 4 more plants that it constructed to private buyers. Canadian Solar is quickly emerging as a strong executor of this particular strategy, which sees it construct power plants using its own solar cells and then eventually selling those plants to private sector buyers. Rival Suntech (NYSE: STP) also tried such a strategy, but poor execution made it backfire and dragged the company into bankruptcy.

All that said, we still do need to be slightly skeptical of Canadian Solar, which is showing a tendency to make multiple announcements that sometimes repeat previously disclosed information. Canadian Solar’s success in the build-and-sell strategy does also seem to be limited so far to plant construction in Canada, so we’ll have to see if it can replicate the model in other markets where it may not have such strong connections.

According to the first of 2 separate announcements issued by the company last week, Canadian Solar sold 2 plants with a combined 16 megawatts of capacity and valued at about $100 million to TransCanada (Toronto: TRP). (company announcement) Canadian Solar doesn’t say how much TransCanada actually paid for the plants, which seems to imply it may have sold them at a discount to their actual value. The deal was part of a previously announced plan to sell 9 plants to TransCanada for nearly $500 million, and marks the second and third sales in that bigger deal.

The second of the announcements looks similar, but is more interesting because it involves the sale of 2 other self-built plants to a fund managed by BlackRock (NYSE: BLK), a top US fund house. (company announcement) No price was given, but the announcement says the plants with combined capacity of 20 megawatts in the Ontario area were sold at a price comparable to similar recent sales in the area. From my perspective, the most encouraging element of this piece of news is the fact that BlackRock was the buyer, as this demonstrates that Canadian Solar knows how to build plants that will appeal to true financial-sector investors.

Stock buyers seem to like the Canadian Solar story, bidding up the company’s shares sharply in recent weeks. The company’s stock is up more than 50 percent since the beginning of September, and has risen nearly 6-fold for anyone who was foresighted enough to buy the shares at the beginning of the year. Canadian Solar has also been notable as one of the only major players to forecast a return to profitability this year, with the company recently reiterating its aim to be profitable for the full year 2013.

Other players that look set to survive the nearly 3-year-old downturn have also rallied sharply this year, with shares of Trina (NYSE: TSL) and Yingli (NYSE: YGE) both more than tripling since the start of the year. Both companies have reportedly been bidding to buy major assets from Suntech, which is hoping to soon emerge from a bankruptcy reorganization that will most likely mark the end of its life as an independent company.

All of these latest developments, combined with China’s recent pledges to strictly limit construction of new panel plants, look like they could finally lift the industry out of its doldrums. If the current trends continue we could see Canadian Solar become the first of the major players to return to profitability in its upcoming third quarter report, with other major players gradually returning to the black over the next few quarters.

Bottom line: Canadian Solar’s sale of 2 power plants to a BlackRock managed fund reflect strong prospects for its business model, boosting its chances to return to profitability this year.

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

October 11, 2013

SolarCity Buys Zep: Behold The Power of Vertical Integration

To win the U.S. solar installation game, SolarCity (SCTY) continues to go vertical and thin its margin stack... so what'll be next?

James Montgomery

SolarCity (SCTY) is acquiring Zep Solar and its rackless mounting design in a $158 million stock deal, illustrating the growing importance of improving costs and complexity in residential solar.

Much of the cost-cutting in solar PV has been shouldered by the upstream manufacturing side, but half the costs or more in a residential solar PV system come from the softer side, and they'll have to keep coming down dramatically to support widespread deployment of distributed solar PV. For its part, Zep Solar has planted its flag in the installation innovation field with interlocking frames and specialized components that simplify solar array installations, and its licensees include more than a dozen prominent PV module manufacturers and component/inverter makers.

Last November SolarCity signed up too, and since then the company's crews have doubled their daily pace of residential installations, averaging 4-5 hours instead of a day or two, according to Tanguy Serra, SolarCity's executive VP of operations. That means lower costs, and better service because of less tromping around on customer's roofs. Today "the overwhelming majority of our systems use Zep," he said. And so, as the old story goes, they liked it so much they decided to buy the company.

It's likely no accident that the two largest U.S. solar installers, SolarCity and Vivint, have vertically integrated business models. To get scale and costs down in the U.S. market "you need to be vertically integrated," explained Serra. That means "we want to avoid margin stacking; we take it out everywhere we can." To that end, barely a month ago the company acquired sales channel partner Paramount Solar, underscoring the importance of solar customer acquisition. Snapping up Zep similarly will take a slice out of SolarCity's cost structure for components.

Owning Zep also gives SolarCity access to future technology in the pipeline. Serra was particularly enthusiastic about Zep's development in two areas: non-penetrating commercial roofs, which he emphasized "is a big, big deal for us" as they go after large-scale commercial retail clients like Wal-Mart and BJ's; and carports, which for retailers provide a guaranteed cost of power and shade for customers. Current carport products on the market are too expensive and complicated, he said, and cracking this market is "a phenomenal opportunity."

SolarCity will honor all existing Zep customer contracts to their end, and then will manage partnership requests on a case-by-case basis, Serra explained. (Vivint's also a Zep customer, at least for now.) Ultimately "the vast majority of resources" will be directed to international growth, he said, from Germany to Australia to Japan to the U.K. Residential solar is picking up in Japan, where there's a strong emphasis on aesthetics for any product, and that's Zep's forte -- Zep's sleek black skirt "looks great on Japanese slate," the most common roofing material there, Serra noted. The idea is that Zep also can help pull SolarCity into these markets, but SolarCity won't sell power in international markets "just yet," he said, so it won't compete directly with those regional installers.

So where else in this vertically-integrated solar installation cost stack is ripe for trimming? " If you've got to pay margins to a marketing company, an installation company, a financing company -- that's three or four layers of margin, that ultimately gets borne by the end consumer," not to mention a complex coordination of partners, Serra said. He wouldn't say, of course, citing corporate quiet-period rules, whether that means SolarCity's next M&A target is a financing company, only hinting that "as opportunities come up we will consider them."

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.

October 10, 2013

Graftech: On Graphite Coattails

by Debra Fiakas CFA

Graftech makes graphite
products like this crucible for
traditional industries, and
is expanding its products for
alternative energy industries
Photo by Vladnov
Graftech International Ltd. (GTI:  NYSE) has been in business over a hundred years, supplying graphite materials and products to the steel industry and other manufacturers.  Most investors would put Graftech on a list of ‘dirty’ companies, not with alternative energy leaders.  However, with technological innovation Graftech has found new customers for its graphite materials.  Fuel cell components, wind turbine blades, energy storage devices, and electronic thermal management components are just a few of the products critical to the establishment of alternative energy sources.

Graftech has struggled some in recent months to keep momentum going at this top-line, but long-term the company has experienced strong growth.  The addition of new customers in the alternative energy industry has been a part of that growth.  In the most recently reported twelve months Graftech recorded $1.3 million in total sales and delivered $66.9 million in net profits.  Operating cash flow was $144.5 million.

GTI is trading at 17.4 times trailing earnings, which is just under the average price/earnings ratio of its industrial peer group.  There is a 30% differential between the trailing and forward price/earnings ratios, suggesting an impressive appreciation potential. A beta of 1.40 means relatively low volatility for the holder waiting for a price increase.

Of course, the half dozen analysts who have published earnings estimates for Graftech could be all wrong in their predictions of future earnings.  That would cast doubt on the anticipated ramp up in stock price.  One thing for certain is that graphite has a compelling future in the alternative energy sector and it seems reasonable Graftech will be a beneficiary.  
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

October 09, 2013

The Andersons: E14 Ethanol Blend

by Debra Fiakas CFA

The Andersons (ANDE: Nasdaq) is not one of the first companies that comes to mind as an alternative energy company.  However, ANDE has been in the Ethanol Group in our Beach Boys Index for some time.  Ethanol is one of six revenue sources for The Andersons, contributing $743 million to the top line in the year 2012.  That represents about 14% of The Anderson’s total revenue base.  The company produces ethanol in four plants located in the Midwest with a production capacity of 330 million gallons per year.
Andersons Ethanol Plant
The Andersons Clymers Ethanol
Plant, Logansport, Indiana

Unfortunately, the ethanol segment is not consistently profitable.  In 2012, the company disclosed a $3.7 million operating loss on the $743 million in ethanol sales.  This follows a small profit of $23.3 million in 2011.  The ethanol operations were hit by narrowing profit margins, but the real problem in 2012 were substantial losses in unconsolidated operations, in which The Andersons have invested but do not have control.

All of the company’s other five segments are profitable.  Consequently, The Andersons has delivered profits in every one of the last ten years.  In the most recently reported twelve months The Andersons reported a net profit of $73.6 million on $5.7 billion in total sales.  Cash generated by operations totaled $402.9 million, representing a sales-to-cash conversion rate of 7.1%.

Unfortunately, the consistency in earnings and cash flow has not impressed investors.  The stock trades at 17.6 times trailing earnings, while other food commodities companies trade near 22.0 time earnings.  ANDE trades at lower multiples of sales, cash flow and book value as well.

Alternative energy companies have been slow to achieve profitability.  They frequently operate at a loss for so long it is necessary to raise capital, diluting the equity positions of early investors.  It makes sense to take an alternative strategy  -  invest in established companies that have integrated alternative energy projects into conventional operations.

A review of historic trading patterns in ANDE suggests the stock has developed enough momentum to reach a stock price near $86.00.  This target price represents 25% upside from the current price level.  It is also a multiple of 15.7 times the 2014 consensus estimate  -  well below the company’s peer group.  A forward dividend yield of 0.9% is better than a poke in eye with a sharp stick.

Thus a position in ANDE gives investors consistent financial performance at a decent price from a company that has its foot in the door of alternative energy.
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

October 08, 2013

BlueFire Renewables: Solid and Liquid

Jim Lane

You just can’t beat the financing of renewable fuels for all-out zaniness. Tragicomedy, anyone? Consider the case of BlueFire Renewables (BFRE).

Sometimes, the financing of renewable fuels can start to sound a little like an Abbott & Costello routine.

The planned
BlueFire plant
The planned BlueFire plant

Allow us to summarize. You can finance a liquid renewable fuel as long as the market is solid, especially if you are making solids, and the market for solids is liquid, and your liquidity is solid. Adding solids to your liquids will make you more solid, and eventually more liquid. If you know what I mean.

In other words, to get altitude, what you need is a little more grounding.

So that clears up that.

Fuel financing paradoxes and BlueFire Renewables

The paradoxes of financing renewable fuels come to mind with the news, from BlueFire Renewables (BFRE), that they have conjured up a new configuration for their long-contemplated cellulosic biofuels project in Mississippi. To which they have added wood pellet production.

The process — well, it’s been proven at pilot scale for more than a decade — is based on the old Arkenol technology that has been in place in Japan since 2003 — an acid pretreatment that releases cellulosic sugars for fermentation. BlueFire has long demonstrated production of biofuels from urban trash (post-sorted MSW), rice and wheat straws, wood waste and other agricultural residues.

Back in 2009, BlueFire was one of six companies to receive large DOE grants aimed at stimulating the cellulosic biofuels markets in time for the large cellulosic targets that were a key part of the Renewable Fuel Standard.

Given that the technology was already long-in-place at pilot scale, it had an advanced state of technical readiness compared to other technologies just then coming along — companies like KiOR, for example, were just getting underway. So, it landed $88 million under the American Recovery and Reinvestment Act, in December of 2009 (largely still untapped, at this stage, as the grant money is staged and most of it tied to future project milestones).

After the 2009 grants, the financing process started for that generation of technologies that BlueFire found itself amongst. It’s a script right out of the Marx Brothers.

“Cowcookies”, the lost Marx Brothers script

Scene, an office on Wall Street. Enter a lender, Harold P. Cheesebreath — and his prospective borrower, Al Cohol.

Cohol: (confidently) See here, it’s a no-brainer. Mandated fuel, pilot-proven technology, no food crops, carbon-friendly.
Cheesebreath: I don’t care about carbon.

Cohol: (brightly) OK, here’s a mandated fuel, demonstrated technology, and no food crops.
Cheesebreath: I don’t care for mandated markets.

Cohol: (chastened, but unbowed) OK, here’s a demonstrated technology, and no food crops.
Cheesebreath: Why can’t you use crops with a track record?
Cohol: (sighing) Because those would be food crops.
Cheesebreath: Food vs fuel? Well, I won’t finance that.

Cohol: (sadly) OK, here’s a demonstrated technology.
Cheesebreath: I don’t do first commercial projects. I’ll do your next one.

Cohol (brightening): You mean you’ll finance my second plant?
Cheesebreath: No, your next one. If you’re planning your second, I’m only interested in your third. If you’re ready for your third, I’m only interested in your fourth.

Cohol: (distressed) But that will take at least five years, to get to a fourth.
Cheesebreath. And that’s another thing, your sector is always five years away.

Cohol glumly leaves the building.

Of course, most project owners give up at this stage. Which appears to be the point of the process.

But some carry on. In doing so, they remind us of the character of Boxer, an impressively strong and dedicated horse who plays a leading role in George Orwell’s Animal Farm. At a time when the pigs running the farm had become completely corrupted, and the farm went through a great crisis, Boxer reflected:

“I would not have believed that such things could happen on our farm. It must be due to some fault in ourselves. The solution, as I see it, is to work harder.”

BlueFire soldiers on

And so, those project owners that carry on, carried on as if the fault lay within themselves and simply worked harder. In the case of BlueFire, it has been a half-decade of structure the deal, re-structure the deal, and re-re-structure the deal until you’d think that Joan Rivers had fewer facelifts.

“While the rumors, hopes and comments about our death have swirled about,” CEO Arnold Klann reflected with a sigh, “we have been trying to figure out how to finance a first of its kind commercial project without any corporate, venture, cash flow or other financial support.

“I can say with great confidence, we know at least 50 ways on how not to finance a project. I am thinking about writing a song about it to the tune of “50 ways to leave your lover” by Paul Simon. The other thought is to write a book,” Fifty shades of no financing”.

As Paul Simon wrote in 50 Ways to Leave Your Lover:

She said it grieves me so
To see you in such pain
I wish there was something I could do
To make you smile again
I said I appreciate that
And would you please explain
About the fifty ways

But Klann demurs in explaining the fifty ways. One of those optimistic types who generally insists on putting the past in the past. Instead, he’s focused on the next structure, the next financing. You have to admire that indefatigable quality; it’s the quality that Edison had.

“While it has not been easy nor fun,” he told the Digest, “I think we may have discovered the way for a pure project finance that stands alone.”

Option #51: The pellet story

What is it? BlueFire has integrated a synergistic wood pellet production plant to its proposed facility in Fulton, Mississippi. The reconfigured design will be a 9 million gallon per year ethanol plant integrated with a 400,000 ton per year wood pellet plant. The pellets will be sold under long term contracts into the European mandated renewable energy market.

Traditionally wood pellets are used for electricity generation and can be sold under long term, fixed price contracts to credit worthy utilities thereby adding financial stability to a project.

Klann explains. “This restructure provides a more robust economic model for the Fulton facility with a significant increase in projected revenues. It has become apparent in our attempts to obtain financing for the project that the right synergies and revenue model would be needed to build this first of a kind facility.

“The optimum use of biomass in the integrated facility strikes a much better balance of revenue with costs and a better utilization of resources. The more profitable use of capital and the enhanced security of projected revenue streams more closely match what the banks have been requiring in the very conservative and restricted credit markets.”

Ah, you see, there’s the lignin to be considered. A byproduct of most cellulosic biofuels processes — especially those of the enzymatic kind (as opposed to the thermochemical companies that blow through lignin’s complex bonds by meting them with heat).

And you know what they say about it. “You can make anything with lignin except money.”

But here’s the exception to the rule, Klann says. Blended with lignin from BlueFire’s process, the wood pellets create a market advantage under the international mandates for renewable energy, especially for power in the European Union.”

The state of play

BlueFire has previously announced start of construction in Mississippi and has completed the preliminary site work for the ethanol facility. The engineering and other development activities needed are already under way to add the pellet plant. Synergistic partners will be announced once the definitive agreements are signed.

The Bottom Line

Will this approach work? Only those with access to the complete data will ultimately be able to tell. But it’s significant that we haven’t heard a media-ready peep out of BlueFire for nearly 17 months as they have gone through their financing cycles. Klann and his clan are the opposite of hypesters.

So, that they are prairie-dogging this approach and sticking their heads out of the dark tunnels of financing and showing themselves to the outside world — well, it’s a good sign.

And we wish them well. More about BlueFire here.

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

October 07, 2013

Q3 Review: A Bottom For Clean Energy Developers?

Tom Konrad CFA

In the third quarter, clean energy stocks in general continued their upward trend, turning in a 27% gain for the quarter and a 64% gain for the year as a whole, as measured by my benchmark and most broadly held clean energy ETF, Powershares Wilderhill Clean Energy (PBW.)  This brings PBW back up to levels last seen in September 2011. 

The broad market and my model portfolio of Ten Clean Energy Stocks for 2013 have also done well.  My small cap benchmark (IWM) is up 10% for the quarter and 31% for the year, while my model portfolio is up 10% for the quarter and 21% for the year.  I am disappointed, however, that my model portfolio now looks virtually certain to under-perform its sector benchmark for the first time since I started writing about in 2007, and the odds don't look good for beating the broad market, either.


While some of my under-performance can be attributed to my long-term avoidance of the solar sector and stocks which are household names (which has served me quite well over the last several years,) the poor performance of renewable energy developers and internationally listed companies (mostly in Canada) have also been a significant drag on the model portfolio.

Along with my model portfolio, I also included a list of six alternative picks of clean energy companies I liked, but which I did not include in the main list because I felt they were not as well valued as the others. I intended that readers who were uncomfortable with any of my top ten picks to substitute from this alternative list, instead.  For instance, some of my picks are rather illiquid, and so larger investors would be unable to buy them without moving the share price too much. Similarly, readers who were not unwilling or unable to buy stocks which only trade internationally could put together a portfolio of nine US-listed stocks.

10for13 Q3 composites.png
The chart above shows what the effects of such substitutions would have been, and also shows the performance of the clean energy sub-sectors (Efficiency, Efficient and Alternative Transportation, and Renewable Energy Developers) that account for at least four stocks among the sixteen.

As you can see, readers who decided to only use the highly liquid stocks from the two portfolios (the "Liquid" portfolio) or the US-Listed stocks (the "Domestic" portfolio) did somewhat better than those who decided to use my ten top picks. This is typical of the early stages of investor interest in a sector: The easy to buy and research stocks advance first and investors become familiar with a new (to them) sector.  If investors' renewed interest in clean energy stocks persists, we can expect its effects to spread to less liquid, lesser known, and more esoteric parts of the sector.

You can't get much more esoteric than my collection of small and micro-cap Canadian renewable energy developers with listings on the  Toronto Stock Exchange (TSX):  Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF), Alterra Power (TSX:AXY, OTC:MGMXF), US Geothermal (NYSE:HTM, TSX:GTH), and Ram Power Group (TSX:RPG, OTC RAMPF).  This group declined an average of 22% for the year (including the effects of the declining Canadian dollar.)  All have operations outside Canada, but only one (US Geothermal) also has has a US listing, and has significantly outperformed the other three.  The three TSX-listed developers were down an average of 34% for the year, although they were up 1% in the 3rd quarter, while US Geothermal is up 16% year-to-date, despite having been, in my opinion, less undervalued in January.

I think the enthusiasm for US-listed clean energy stocks is largely driven by the resurgence of solar and other "story" stocks such as Tesla Motors (NASD:TSLA.)  Investor enthusiasm for the Tesla story may also deserve credit for some of the strong performance (30% for the quarter, 53% for the year) of the transportation-related stocks in my portfolio (which does not include Tesla.)

10for13 Q3 developers.png

Developing a Bottom

I included the four developers in the lists because, at the start of the year, I felt they were all trading at significant discounts to what their assets would fetch on the open market.  Most stark of these was Finavera, which had recently reached a deal to sell most of its wind farm developments to Pattern Energy Group (NASD:PEGI).  Unfortunately, two of the four wind developments Finavera was planning on selling turned out to be nearly impossible to permit, and then and a few delays shrunk my C$0.80 valuation at the time to just C$0.22, about what the stock was selling for in January.  At C$0.13 it's still a good value, but we're unlikely to make a profit on this one.

The news at the other three developers, US Geothermal, Ram Power, and Alterra Power, in contrast, has been better, yet only US Geothermal has advanced.  All three have been producing power and positive cash flow, yet can't seem to catch investors' attention.  Yet given the current valuations, they don't need investor attention to produce handsome returns from current prices.  Including Pattern, there are a number of publicly traded renewable energy power producers would could buy US Geothermal or Ram Power outright and increase their cash flow per share.  Given the exercise of Pattern's over-allotment option, the company has over $60 million it can use to purchase renewable energy companies projects.

At Pattern's current price of $23.29, it is trading at a forward dividend yield of 5.4%, at the low end of the 5% to 8% range of the five Canadian Power Producers discussed here.  If US Geothermal's distributable income were valued on the same basis, it would be worth $0.66 per share for an 8% distributable income yield, based on management's projections for 2013 EBITDA and my interest estimates.  Ram is in the process of remediating some of the wells at its San Jacinto-Tizate project, and this seems to be progressing well.  When this is complete, the projects should be able to resume distributions to Ram.  Hedge fund manager Keubiko valued Ram at $1 per share based on this one project in July. 

Alterra is currently generating C$55 to C$60 million in annual EBITDA, and has debt service obligations of C$36 million for the next three years (after which they decline.)  That leaves C$20 million of distributable income, or over 4 cents a share, which would lead to a value per share of C$0.54 at 8%, or C$0.86 at 5%, valuations which assign no value to the company's development projects and rapidly declining debt service in 2017 and beyond.  Given the conservative nature of this valuation, I think C$0.86 is closest to Alterrra's true value, despite the fact that the stock is currently trading at C$0.30.  Alterra would not need to be bought out to achieve this valuation, all it would need to do would be to start paying a dividend, and get a US stock market listing (as Brookfield Renewable Energy Partners (NYSE:BEP)) recently did.

All three might reach higher valuations than I outlined above by continuing their strategies of developing projects and improving cash flows, but that would likely be a much longer term proposition.


With these developer stocks having stopped declining, and conservative valuations of their assets worth two to six times their current stock prices, I've been adding to my positions in Ram Power and Alterra.  Potential buyers are multiplying as renewable energy power producers get access to cheap capital on the US markets, meaning more money will be chasing a limited pool of assets.  These under-priced TSX-listed developers should become increasingly attractive acquisition targets for the likes of Patten and Brookfield, which memorably bought Western Wind Energy earlier this year.

While such buyouts take time, an offer or two later this year could do a lot to bring my model portfolio's performance up closer to its benchmarks.

I plan to follow up with a discussion of recent news events affecting the rest of the stocks in my model portfolio soon.

Disclosure: Long FVR, AXY, HTM, RPG, BEP.  Short TSLA calls.

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.

October 06, 2013

New Energy IPOs

by Debra Fiakas CFA

IPO wordcloud.jpg
IPO Wordcloud photo via BigStock
Investors looking for a piece of the public offering action from the alternative energy industry have been sorely disappointed in recent months.  The last big initial public offering in the sector was SolarCity, Inc. (SCTY:  Nasdaq) in December 2012.  Then in April 2013, there was an initial public offering of the REIT Hannon Armstrong Sustainable Infrastructure Capital (HASI:  Nasdaq). 

Anyone looking for bragging rights to IPO shares will have to look to the conventional energy market.  Last week Valero Energy (VLO:  NYSE) filed to raise as much as $300 million in a new master limited partnership it is forming called Valero Energy Partners, a logistics-based business.  The partnership is to own oil and refined petroleum pipelines and terminals in the Midwest and the Gulf Coast.  Valero has a handful of ethanol plants and a wind-farm as well as the Diamond Green Diesel joint venture with Darling International (DAR:  NYSE).

Cheniere Energy, Inc. (LNG:  NYSE) is undertaking a bit of reorganization.  A new holding company has been organized  -  Cheniere Energy Partners LP Holdings  -  that will own a 56% stake in a Cheniere master limited partnership.  The underlying assets are regasification facilities at the liquid natural gas terminal Sabine Pass in Louisiana.  It will be a very large offering of $690 million and it will give investors a stake in proven, stable assets and a flow of business in the burgeoning U.S. natural gas market.

By comparison the $100 million offering planned by EP Energy Corporation is chicken feed.  However, the preliminary valuation of the company is $8 billion, implying a nice step up for it owner private equity group Apollo Group.  It was just last year that Apollo had taken the company private as a maneuver to enable in the sale of parent El Paso Corp. to Kinder Morgan.  Apollo paid $7.15 billion.  The ‘new’ EP Energy is expected to trade under the symbol EPE.

A stake in any of these deals means predictable earnings and cash flows, something alternative energy companies have been slow to deliver. SolarCity is still operating in the red and Hannon Armstrong reported a whopping $5.7 million loss on $3.4 million in sales just in the June 2013 quarter alone.  Perhaps a stake in one of these cash generating gas companies on the current IPO calendar can help investors wait out ramp to profitability in the alternative energy plays.
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. Crystal Equity Research has a Buy rating on DAR shares. 

October 05, 2013

Metal-Air Battery Stocks

by Debra Fiakas CFA

Earlier this year, we added metal air batteries and the companies who are working to commercialize the technology on our list of promising acts to follow.  The Israeli battery developer, Phinergy, was added to our Mothers of Invention Index.  Back when I wrote the post “More in the Air than Spring” back in April 2013, Phinergy had attracted a bit of attention for a road test of Citroen C1 car outfitted with a technology far different than conventional lithium ion.  No one knows Phinergy.  It is too small and too foreign to impress U.S. investors.  I did not expect anyone to really pay much attention.

In June 2013, a U.S. company with a very high profile was awarded a patent related to metal air battery technology.  This has put the words ‘metal-air’ on the tongues of nearly every investor and pundit across the country  -  electric sports car phenom Tesla Motors (TSLA:  Nasdaq).  It seems quixotic for a small-fry like Phinergy to chase after unproven battery technologies.  However, when the arguably most financially successful electric car producer in the country stakes a claim on the same technology, it is time to take it seriously.

Notably Tesla’s patent addresses the linkage of lithium-ion with metal-air batteries as first and second battery packs for an electric car.   This is the same strategy that was being tested in the Citroen C1 by Phinergy.  The idea is to extend the driving range by making available a high energy intensity power source like the metal-air battery that is better equipped for the long trip.

International Business Machines (IBM:  NYSE) has the same idea in mind with its Battery 500 Project.  The group’s goal is to develop a lithium-air battery system with a 500-mile range per charge.  Most importantly the battery system is to be light weight  -  no heavier than a conventional combustion engine.

Getting a stake metal-air battery technology is challenging for the minority investor, especially U.S. investors.  Phinergy is a private, foreign company.  Tesla has publically traded stock but let's face it, the stock appears unaffordable at the current price level.  A stake in IBM is a play on all manner of technology and products, but batteries are a very small part of the bigger IBM picture.

In my April 2013 post I had offered Arotech Corporation (ARTX:  Nasdaq) as an alternative to play metal-air battery technology.  Arotech is profitable and trades at 9.8 times trailing earnings.  The company has concentrated on military applications for its rechargeable zinc-air battery technology, selling the Soldier Wearable Integrated Power Equipment System (SWIPES) to the U.S. DOD.  Combined, its lithium battery and zinc-air batteries and systems account for approximately one-fourth of total sales.  Earlier in September Artotech raised $6.0 million through an underwritten offering of its common stock.  Expect acceleration in Arotech’s development activity.  More likely Arotech will begin trolling for an acquisition that improves its position in the military market.

Metal-air battery technology still has a ways to go before it becomes common place.  However, Arotech has proven it commercially viable in a niche market.  Phinergy and apparently Tesla have proven it workable in the electric automobile.  It is only a matter of time before the rough edges are hammered out and a very large consumer car market becomes reality.
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.  

First Solar Keeps Buying Solar Projects To Keep Pipeline Full

James Montgomery

First solar logoFirst Solar (FSLR) has added another mega-scale project to its pipeline, helping ensure there's enough to feed its thin-film solar PV manufacturing machine.
Rock formations in Clark County, NV. Photo by John Fowler

The 250-MW Moapa project being developed by K Road in Clark County, Nevada, about 30 miles north of Las Vegas, was given a green light last summer, making it the first major U.S. solar project approved on tribal land. Construction has been pushed back roughly a year from the original timeline, with First Solar now saying it could start by the end of this year and be finished by the end of 2015. Swinerton is the EPC contractor. The project has a 25-year PPA with the Los Angeles Department of Water and Power (LADWP), at an average price of $0.094 per kWh (tied together with a PPA with Sempra's Copper Mountain 3).

The Moapa Band of Paiutes has very big plans for renewable energy. Weeks ago they announced plans to develop up to 1.5 GW of renewable energy across their 70,000 acres of tribal lands. They are particularly keen on renewables since a nearby 550-MW coal-fired plant is slated to shut down over the next couple of years.

First Solar has consistently had to restuff its pipeline to feed its PV manufacturing machine, as it finishes projects in record numbers. As of its most recent quarter the company's project pipeline was roughly 1.5-GW of mid- to late-stage projects and about 6.6 GW of projects in a 1-2 year development cycle. The need to keep feeding that pipeline is increasingly important as projects become scarcer, competition for them ratchets up, and their economics continue to compress. In August the company bought a 1.5-GW portfolio of solar projects from Element Power, and inked a partnership with Belectric to target smaller sub-20-MW projects in the U.S.

K Road, on the other hand, recently abandoned its ~300-MW Calico Solar Project after many changes and resubmissions, from scaling it down to switching from concentrating solar to PV. Its sole solar power project now appears to be the 25.8-MW (AC), McHenry Solar Project, in Stanislaus County, CA's Modesto Irrigation District, which it acquired from SunPower (SPWR) last spring.

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.

October 04, 2013

Investor Enthusiasm for Graphene: Strong as Graphene

Tom Konrad CFA

Graphene is going to transform clean tech in less than five years.

Graphene Timeline - Poll.png

That, at least, is the opinion of the majority of the respondents to my reader poll about how graphene is likely to affect clean tech stocks.  This is in marked contrast to the caution expressed by the the responses from my panel of professional money managers who invest in clean tech stocks. (Their responses are the subject of a previous article on graphene investing.)

I think Shawn Kravetz, President of Esplanade Capital,  LLC, and manager of solar-focused hedge fund Electron Partners, LP exemplifies the panelists’ attitude towards greaphene’s likely impact on their investments: “I must respectfully pass on this one.  Ignorance is indeed bliss in this case.”  Technologies, like graphene, which are still in the lab, won’t have much impact on stocks’ performance until they are commercialized and can start contributing to a company’s revenue.  Commercialization usually takes much longer than innovators and many investors think.


Flexible Graphene Sheet image via BigStock

In my research, I found many companies which are developing graphene applications, and rushing to patent the results.  Most of these applications are still years from producing measurable revenue.  One example from my previous article was Lockheed Martin‘s (NYSE:LMT) patent on graphene water filters in March.  Lockheed clearly has the financing and brand name needed to commercialize this application quickly, but only says that it aims to have a prototype ready for testing by 2014 or 2015.  That puts the launch of a commercial product at least another three years beyond that, to give time for adequate testing an manufacturing scale-up at least five years out.

Perhaps other applications can be commercialized more quickly, but the “less than a year” or “1 to 2 years” responses to my poll seem very unrealistic, unless we are talking about inks and other applications of graphene powder, which is just normal graphite exfoliated into tiny molecule-thick sheets, lacking many of the properties of large graphene sheets which make graphene exciting in the first place.

Graphene… From Graphite Flakes 

I was contacted by the Corporate Communications officer of Grafoid, Inc in response to my poll and upcoming articles, and later did a short interview with its CEO, Gary Economo.  Grafoid describes itself as “a privately held Canadian graphene development and investment company,” 21% owned by Focus Graphite, Inc. (TSX-V:FMS, OTC:FCSMF,) a junior mining firm which owns the high grade Lac Knife graphite property  in Quebec, Canada.  It was previously known as Focus Metals, but changed its name to Focus Graphite in 2012.

Grafoid’s signature product is MesoGraf™, a range of trademarked bilayer and trilayer graphene product created from graphite ore using a “novel chemical exfoliation and transformation process.”  I am skeptical of graphene refined from graphite, because most of the potentially revolutionary applications for graphene require the use of large sheets of graphene, and established companies and researchers seem focused on creating graphene by vapor deposition.

In terms of applications, Grafoid’s projects are in the laboratory stage, and they include a graphene cathode for a patent-pending improved lithium ferrophosphate (LFP) battery developed Hydro-Quebec.  Grafoid is also doing research into highly conductive, energy absorbent, and strong plastics made using graphene as an additive. Grafoid has applied for patents on its mixing process, which Economo says is the key to getting high quality graphene infused plastics.

He also told me that Grafoid is able to create large, (“as big as a table”) well structured sheets of graphene from MesoGraf, although he did not mention any applications of MesoGraf using large sheets made in this way.  If scalable and the sheets are of controllable quality, such sheets would open the door to most graphene applications.

My reaction to Grafoid is “too good to be true.”  It’s my experience that the time between success in the laboratory (which is where both companies seem to be with their graphene) and a commercial product is measured in years.  The road to commercialization is long (unless it is a dead end) and typically requires repeated rounds of financing which often leave small investors owning little of the final product.

A similar company to Focus Graphite, Lomiko Metals Inc.  (TSX-V:FMS, OTC:FCSMF) was recently in the news for having turned graphite into “graphene oxide.”  (Grafoid also says it can also easily oxidize MesoGraf.) The graphene supercapacitors which made headlines last March were made from graphene oxide using the laser from a DVD burner.

A company representative left a comment on my previous post saying the company is

[W]orking closely with Glabs [Graphene Laboratories of Calverton, NY] to develop supercapacitors and other devices and ideas using graphene converted from natural flake graphite we find in Quebec.  The connection between graphite and graphene on a scientific level is large.  However the some of the amazing properties of graphene can be found in graphene nanoplatelets.  Imagine graphene to be a pristine, smooth plywood sheet and nanoplatelets a particle board or cork board formation.  This structure may increase conductivity but reduce strength and make the substance useful in battery and supercapacitor applications (which we are working on).  As you know, there are more than 9000 patents for graphene.  There is enough flake graphite resources to supply the creation of an industry based on graphene.  But few are working on the pinch point of the hourglass – the conversion technology.  That is what Lomiko and Glabs would like to create graphite and graphene substances that focus on one or two of the qualities of graphene – strength, conductivity, or elasticity and produce it for pennies per gram.  Current costs of $ 100 – $1000 per gram are prohibitive for production purposes.

According to my professional investor panel and several respondents to my poll, suppliers of graphene like Lomiko and Focus Graphite, as well as associated production equipment such as Aixtron (NASD:AIX) and CVD Equipment Corporation (NASD: CVV) because of their ability to benefit from a broad range of commercial applications.

However, given the early stage of Grafoid’s and Lomiko’s research, I believe these two companies should only be considered as investments on the basis of the value of their graphite mines. Graphite will have value whether or not it turns out to be a practical source of graphene feedstock.  If these companies can be bought at attractive valuations based only on their mining assets, then graphene may provide a potential long-term upside.

As with commercial graphene applications discussed in the previous section, investors need to realize that the commercialization of graphene from graphite technology will be a very long haul if it is not a dead end, and invest accordingly.

Effects on Cleantech Stocks

Graphene Sectors - Poll.png

Considering the effect on an industry’s competitive landscape is very useful to understanding have a new technology might affect stocks in that industry.  An industry will benefit if the technology makes its suppliers’ markets more competitive, while they will be hurt if new competitors are likely to emerge using this technology, making the markets for its products more competitive.

Many investors tend assume that if a new technology has application to an industry, it will help the stocks in that industry.  This is seldom the case.  Consider, for instance, the effect of First Solar’s (NASD:FSLR) thin-film CdTe photovoltaic technology on incumbent solar companies.  By producing solar panels at a lower cost per watt than its competitors, First Solar reduced the margins of these competitors as it scaled up production by pushing the price of solar panels down.  Meanwhile, all solar manufacturers’ customers benefited.  The market for solar exploded as solar installers, developers, and their customers took advantage of rapidly falling prices.

In the case of graphene, the top applications suggested by readers were Solar Cells, Ultracapactiors, Batteries, Electronics, protective coatings, and water filtration. If this is correct, the biggest beneficiaries should be those industries which use these products.

Cheaper and better ultracapacitors and batteries should help electric vehicle companies, their customers, while likely harming electricity storage incumbents (competitors.)  Poll respondents identified electric vehicles as the most likely sector to be helped (88%) and least likely to be hurt (0%), but were also bullish about utracapacitor stocks (83% helped, 8% harmed) and battery stocks (70% helped, 18% harmed.)

Variable electricity generation technologies such as Solar and Wind might be helped by cheaper energy storage which could make it easier to integrate these resources into the electric grid, but wind stocks are much more likely to be helped than solar stocks.  Wind companies, unlike solar companies, are unlikely to see new competitors emerge using graphene based technology, but ultracapacitors are used in the electronics of wind turbines.

Companies which may supply companies using graphene technology may also benefit from new markets for their products.

With wind and solar sectors, my respondents seem to have the relative effects of graphene reversed (after correcting for the general bullishness.)   Most (79%) of my poll respondents thought solar stocks would be helped, compared to only 10% who thought they would be harmed, while 30% thought wind stocks would be helped compared to 26% who thought they might be harmed.

These poll results most likely arise from the assumption that a technology which helps an industry produce better products will help the existing companies in that industry.  As I discussed above, this assumption is most likely false.  A new technology only helps existing companies is when they manage to commercialize the new technology before start-ups or competitors from other industries do. But existing companies tend to be bad at such innovation because of a reluctance to undercut their existing lines of business.

Stock Picks

Given my skepticism of my poll respondents’ accuracy in picking cleantech sectors, their stock picks should be approached with caution.  Below are their suggestions, organized by sector, for those looking for ideas and ready to do some serious due diligence.

Companies with graphene patents:

  • Lockheed Martin (NYSE:LMT)
  • Nokia (NYSE:NOK)
  • AT&T (NYSE:T)
  • Verizon (NYSE:VZ)
  • Tesla Motors (NASD:TSLA)
  • Maxwell Technologies (NASD:MXWL – Note: I am short this stock.)

While these companies may be helped, the effect on their stocks is likely to be small because of their large and diverse existing operations in other businesses.

The exception in this group is Maxwell – it might be helped a lot if it can commercialize graphene capacitors before anyone else does, but it could also be harmed if another company gets there first.  Maxwell has been an active researcher in the graphene space, but management does not typically mention graphene in its MD&A, which leads me to believe that any graphene ultracapacitor from MXWL is years away. On the other hand, Maxwell’s management tends to play things very close to the chest.  They may surprise me.

Potential Graphene and Equipment Suppliers

  • Aixtron SE (NASD:AIXG)
  • CVD Equipment Corporation (NASD: CVV)

I consider this group the best bets, if bought at reasonable valuations based on their current businesses.

Graphene from flake graphite suppliers

  • Lomiko Metals (TSXV:LMR, OTC:LMRMF)
  • Focus Graphite (TSX-V:FMS, OTC:FCSMF)

Best bought only based on mine valuations.  Graphene might eventually provide some upside.


I think the strongest take-away from my reader poll is that cleantech investors expect too much from graphene, and expect it too soon.

Even more than the sector breakdown, the number of poll respondents who think existing cleantech stocks will be helped rather than harmed or unaffected by graphene technology should be a warning sign to prospective graphene stock market investors.  Investor enthusiasm often draws stock promoters, so a company branding itself as a “graphene stock” should be a warning sign in and of itself.  Even if a company has a real way to profit from graphene technology, that technology’s popularity is likely to mean the stock will be overpriced.


This article was first published on the author's Green Stocks blog on Forbes.com on September 24th.

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.

October 03, 2013

Alternative Energy Outperforms All Other Sectors in September

By Harris Roen

Alternative energy MFs racked up extremely robust gains in the past year. Returns range from a low of 16%, to a high of 64% for a mutual fund that is heavy into solar investments. ETFs also did well, but returns are much more variable. They range from a loss of 34% for a carbon ETF, to more than doubling of a solar ETF.

Mutual Funds

Returns remain excellent for alternative energy MFs overall, with average mutual fund up 32.3% for the year. Not a single fund posted a loss in the past 12 months. All mutual funds are also up for three-month and one-month time periods.

The best performing mutual fund over several time frames (12-month, three-month, one-month and one-week) is Guinness Atkinson Alternative Energy (GAAEX), up over 64% for the year. This fund is strongly invested in solar, with top weighted holdings that include SunPower Corp (SPWR), JA Solar (JASO), ReneSola (SOL) and other solar winners.


Exchange Traded Funds

Performance of alternative energy ETFs are better for the year than their mutual fund counterparts, up 36.1% on average. There is a wider range of returns, though, with three out of the 17 ETFs posting double-digit losses.

The best returning ETF is Guggenheim Solar (TAN), up an astounding 113.5% for the year! Though this solar ETF is trading at its best levels in over a year and a half, it is still far below levels it was trading at in the heady solar days of 2008. This suggests that the climb for this fund could continue far past current levels.


Alternative Energy versus Other Sectors

Compared to other sectors of the economy, alternative energy mutual funds and ETFs have outperformed extremely well. According to Morningstar®, sectors on average returned 24%, far below annual returns for MFs and ETFs. It is interesting to note that alternative energy mutual funds and ETFs did much better than the volatile energy sector as a whole (four to five times better in fact).


Monthly returns show even better comparative results. Alternative energy MFs and ETFs beat all the sectors without exception. Comparing the average of all sectors, mutual funds performed almost twice as well, and ETFs almost three times better.


The easy money may have been made in September, led by extremely strong returns in solar. However, I still believe the mindful alternative energy investor is likely to do well in the long term.


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

About the author

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

October 02, 2013

Italian Courts Seize GSF Solar Plants Complicating Suntech Bankruptcy

Doug Young

Asset seizure casts new clouds over Suntech retrench

Someone should write a book about solar panel superstar Suntech (NYSE: STP), whose the incredible rise and spectacular fall has taken yet another intriguing twist with word that some of its major assets have been seized by a court in Italy. The Italian angle is just the latest turn in this international story of a company founded by an Australian-educated Chinese engineer, which once look set to revolutionize the solar energy sector, only to be forced into bankruptcy when the sector plunged into a massive downturn. From a more practical perspective, I suspect this latest development will prolong Suntech’s bankruptcy reorganization, since its creditors may have been hoping to liquidate these Italian assets to repay some of the company’s massive debt.

The assets in question are all owned by Global Solar Fund (GSF), a company that was building solar plants in Europe, including Italy. In many ways, GSF has been one of Suntech’s biggest Achilles heels and continues to haunt the company with this latest development. The fund was set up by Suntech founder and former CEO Shi Zhengrong, who wanted to use the company to build and operate solar power plants in Europe using solar panels supplied by Suntech.

The only problem was that Shi declined to disclose the close financial relationship between his firm and GSF, even as Suntech sold millions of dollars worth of solar panels to GSF and recorded those sales as revenue. Such sales were technically legal, though many would later argue this kind of relationship was questionable because Suntech was basically selling its panels to a company it controlled. Suntech was finally forced to disclose the relationship last summer due to an issue involving a loan guarantee, kicking off a downward spiral that ultimately ended with its bankruptcy declaration in March.

Reports shortly after the bankruptcy declaration said that Suntech was looking to sell its stake in GSF to repay investors and recapitalize as part of its reorganization. (previous post) Those reports said GSF had an enterprise value of $800 million, though its real value was probably far less since many of its plants were built before the industry’s current downturn that has seen panel prices tumble by more than half over the last 2 years.

Suntech’s latest disclosure indicates that a sale of its GSF stake may be difficult or impossible in the near term, since many of GSF’s assets now remain in limbo following their seizure by Italy’s courts. (company announcement) According to the announcement, Italian courts have now seized some 37 solar plants owned by GSF, accounting for about one-fifth of GSF’s total power-generation capacity.

The reasons for seizure look largely unrelated to Suntech’s own woes, and are more due to local issues including improper authorizations and pollution. Still, the seizure of these assets is the last thing that Suntech needs as it tries to reorganize and emerge from bankruptcy. Creditors who were hoping to get any money from a GSF sale will now have to probably put those plans on hold, potentially for years, as GSF’s case plays out in the Italian courts.

Reports earlier this month indicated that Suntech was nearing the end of its bankruptcy reorganization, as it reached deals with its major bondholders and worked to find new investors for its major China-based assets. (previous post) I suspect the creditors were counting on at least some funds from a sale of GSF, perhaps hoping to get $200 million or more. This latest seizure of GSF assets could slow the reorganization process, meaning we may have to wait until next year to see Suntech finally emerge from bankruptcy.

Bottom line: The seizure of Suntech-controlled assets by an Italian court could set back its bankruptcy reorganization by several months.

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.

« September 2013 | Main | November 2013 »

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