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November 28, 2013

Lights Dim At LDK As Deadline Looms

Doug Young 

dim lightbulb.jpg
Dim lightbulb photo via BigStock

I haven’t written about LDK Solar (NYSE: LDK) for a while, so it seems like the release of its latest quarterly results might be a good chance for a final look before the lights go off permanently at this struggling solar panel maker. Somewhat appropriately, LDK announced its results on the same day it also said it continues to negotiate with international investors who are still waiting for an overdue payment on their bonds. (company announcement) The bondholders have just agreed to extend their talks for another 2 weeks, but there’s always the very real danger that they could force LDK into bankruptcy when this new deadline expires on December 10.

I’ll return to the possibility of bankruptcy shortly, but first let’s take a look at the latest results that show just how much LDK has shrunk over the last 2 years. LDK and the higher-profile Suntech (NYSE: STPFQ) have been the biggest victims of the painful restructuring taking place in China’s solar panel sector. But while Suntech’s slow dismantling in a Chinese bankruptcy court has received lots of media attention, LDK’s overhaul has received much less scrutiny because it was never a very strong company even when the industry was booming.

The most notable element in LDK’s latest results is its shrinking top line. The company reported just $157 million in third-quarter sales, and a net loss of $127 million. (results announcement) Anyone looking at those latest figures would probably be most alarmed by the fact that the company’s net loss was nearly as big as its total sales, which is reflected in the fact that LDK’s operating margin for the quarter was negative 50 percent.

A look at the company’s quarterly results just 2 years earlier provides plenty more reason for alarm. LDK’s sales in the third quarter of 2011 totaled $472 million, meaning its sales have shrunk by about two-thirds over the last 2 years. The company’s customers are undoubtedly flocking to more stable rivals like Trina (NYSE: TSL) and Canadian Solar (Nasdaq: CSIQ), which are more likely to still be in business a year or two from now.

LDK has managed to avoid bankruptcy over the last year by selling off assets and taking on new investors, resulting in a painfully slow downward spiral that has resulted in the huge sales drop. That strategy has worked to placate the company’s state-run stakeholders, many of which are connected to government entities in LDK’s home province of Jiangxi. But international bondholders aren’t really interested in such face-saving moves, and simply want their money back.

Those bondholders were supposed to receive an interest payment on August 28, meaning the money is now 3 months overdue. I suspect this latest extension of talks could be one of the last, and that the bondholders will finally tire of playing games with LDK and force the company into a foreign bankruptcy court as early as next month. Some holders of defaulted Suntech bonds used a similar strategy last month, forcing the company into bankruptcy in a New York court, potentially delaying its overall restructuring. (previous post)

One thing I find amusing in all this is that LDK’s New York-listed shares have managed to stay at about the $1.60 level through this entire period of turbulence. Suntech’s stock also stayed relatively high throughout most of its bankruptcy, but suddenly tanked when shareholders finally realized they would lose all their money after the company announced its formal liquidation and its stock was de-listed. I suspect the same fate will come soon for LDK, with shares likely to tumble when bondholders finally tire of playing games and force the company into bankruptcy.

Bottom line: LDK bondholders are likely to force the company into bankruptcy as early as next month, in the first step before a final liquidation and share de-listing.

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.

November 27, 2013

Why Have Ceres' Sorghum Plans Soured?

Jim Lane
Sorghum Bicolor photo by Matt Lavin

As Ceres points towards minimal plantings of its sweet sorghum hybrids in its key market of Brazil for next year, investors ask two questions.

Will sweet sorghum realize its vast potential, and when?

Just when many observers hoped that Ceres, Inc. (CERE) would dramatically expand hectares planted with its Blade hybrid sweet sorghum, the 2014 planting outlook was released last week and the total hectares crashed from 3000 in 2013 to 1000 in 2014.

It’s a far cry from the 8,000 hectares modeled earlier in the year by energy analyst Pavel Molchanov at Raymond James and back in spring 2012, energy analysts Michael Cox and Mike Ritzenthaler at Piper Jaffray wrote: “We are modeling Ceres sweet sorghum plantings to increase from 3,400 hectares to 25,000 hectares next season.”

And 2013′s result came in at 3,000 hectares.

The result? Ceres’ break-even has been pushed back to at least 2017. The company, which has $30 million on hand and is expected to burn $21 million in 2014 to cover development-stage losses, is going to need to raise capital in the next 12 months.

The opportunity

Now, it’s not a trivial feedstock — in fact, it could well be key to health for the Brazilian ethanol sector. As Molchanov writes, “Ceres’ sweet sorghum provides a solution: it can extend a mill’s operations by ~60 days, yielding an estimated $9 million of EBITDA uplift.”

Why? As Ceres pointed out in its original IPO filing, “Due to the inherent limitations of sugarcane physiology and growth patterns, Brazilian mill operators, which have an estimated 3.4 million metric tons per day of crushing capacity, can only obtain usable sugarcane approximately 200 days per year.”

Accordingly, the company staked its sweet sorghum fortunes on Brazil. As we wrote in 2012: “The company’s IPO leans heavily on its prospects in Brazil, where growers and mills see an opportunity to extend mill operations by up to 60 days via sweet sorghum. Such an extension would add, at full capacity, as much as 10 billion gallons of ethanol production on existing land.” Ceres management added: “Our largest immediate commercial opportunity is the Brazilian ethanol market, which currently uses sugarcane as its predominant feedstock.”

The Risks

At the time of the IPO, Ceres shared many of the risks with prospective investors, mostly relating to scale-up and the time it takes for grower adoption. We translated some of those into English in our 10-Minute Guide to the Ceres IPO:

In IPOspeak: The markets for some of our dedicated energy crops are not well established and may take years to develop or may never develop and our growth depends on customer adoption of our dedicated energy crops.
In English: If biofuels and biopower do not scale globally, we are toast.

In IPOspeak: Our crops are new and most growers will require substantial instruction to successfully establish, grow and harvest crops grown from our seeds. A significant increase in the price of sugar relative to the price of ethanol may reduce demand for our sweet sorghum and may otherwise adversely affect our business.
In English: We hope not to be “Son of D1 Oils”.

In IPOspeak: We are at the beginning stages of developing our Blade brand and we have limited experience in marketing and selling our products. Our principal competitors may include major international agrochemical and agricultural biotechnology corporations, such as Advanta, Dow Chemical, Monsanto, DuPont and Syngenta, all of which have substantially greater resources to dedicate to research and development, production, and marketing than we have.
In English: Big Ag may swoop in and take away all our toys.

Competitive forces: Monsanto, DuPont and Syngenta

Is it low yields? Low levels of attentiveness from hard-presssed Brazilian ethanol producers; or a glut of seed players crowding into a development-stage opportunity?

Turns out, could be a combination of all three.

Among the traditional agriseed companies, Monsanto (MON), DuPont’s (DD) Pioneer unit and Syngenta have been actively taking an interest in bringing sweet sorghum to market. Syngenta paired up with Ceres, DuPont with NexSteep and Monsanto has been going it alone.

Hopes were high at one stage. In particular, Monsanto distributed seed equivalent to 20,000 hectares for the 2012 planting season, with 20 mills as customers — and at the time, Jose Carramate at Monsanto told Bloomberg, “This year will be the magic year. We could see 100,000 hectares planted next year at the very least.”

Accordingly, it was cheery news for Ceres investors at the time of its 2012 IPO that “Management has claimed that early indications point to their hybrids performing better than those of their competitors.” Indeed, in product development trials and at the company’s breeding center (Note: where field evaluation plots are irrigated and managed more closely than commercial fields), Ceres hybrids averaged 80 or more metric tons per hectare. Subsequent field evaluations in the Southeast U.S. last summer confirmed similar results.

And, the company, under a DOE grant and in partnership with Amyris (AMRS), successfully demonstrated processing of their sweet sorghum into renewable diesel.

Ceres and Syngenta

So it, was doubly cheery news, when the company struck a sweet sorghum market development agreement with Syngenta in late 2012 and extended it just two weeks ago. Under the renewed agreement, Syngenta and Ceres will continue to collaborate on field evaluations with mills. Syngenta will evaluate its portfolio of crop protection products alongside Ceres hybrids, while Ceres will provide both seed and research support.

With 400+ ethanol mills in Brazil alone, the Syngenta partnership did much to boost seed marketing expectations for Ceres. But, it is not just a case of fending off Monsanto in a big market. There’s DuPont, as well.

DuPont and NexSteppe

DuPont made an equity investment in NexSteppe, and through its Pioneer Hi-Bred business, is providing knowledge, resources and advanced technologies to help the company accelerate the breeding and commercialization of new hybrids of these crops in the United States and Brazil.

Um, who is NexSteppe?

NexSteppe is developing sweet sorghum, high biomass sorghum and switchgrass to produce feedstocks tailored for these biobased industries. NexSteppe is also refining crop management practices and supply chain operations to provide optimized, fully-integrated feedstock solutions. The company was founded just a couple of years back by CEO Anna Rath, who raised $14M in the company’s Series B investment round and counts Braemar Energy Ventures, DuPont, CYM Ventures and Zygote Ventures among the investor group.

The focal points? As with Ceres, a germplasm collection, breeding team and technology platform. The company also indicates thus: NexSteppe: “We are dedicated to overcoming the difficulties faced by processors of our crops, from process-specific compositional optimization to location-specific crop management practices to project-specific feedstock supply-chain solutions.”


According to Molchanov, “Ceres stated that greater-than-expected variability in the yield data from this past season would cause FY14 plantings to “grow more modestly than originally anticipated.” That’s couched in pleasant terms, but the reductions caused Molchanov to reduce his share price target from $20.00 to $1.97 in recent months.

Grower adoption rates

Now, the presence of so many seed options, and yield troubles, invariably will press down hard on the acreage available to Ceres. But there’s a ray of hope.

Though hectares have dropped considerably, the number of mills doing trials has jumped from 30 to 50. In fact, one of the ongoing trends has been the sharp reductions in hectares per trial. In the case of Monsanto, the seed volumes covered 1000 hectares per mill. In the 2013 Ceres trial programs, that figure dropped to 100 hectares per mill. For 2014, the trials are down to 20 hectares per mill.

Good, though, to see that the number of trials has jumped to as much as 20% of the total number of mills.

What about the US Market?

Yep, there’s a US market, too, though far more fuzzy in exact potential, and longer-term in nature. Hence the focus of Ceres and NexSteppe on Brazil.

Another player, focused on the US, is Epec, which includes in its management ranks CEO Ron Miller, former Aventine CEO, and Executive Chairman Steve Vanechanos, Sweet Sorghum Ethanol Association Director, technology entrepreneur, and former member of the Board of Governors for the American Stock Exchange.

Last year, Epec hit the headlines when BioDimensions Delta BioRenewables announced a strategic equity investment from Epec. The investment, it said, will allow the company to install a demonstration sweet sorghum semi-works processing facility at Agricenter International in Memphis, as well as resources to accelerate technology and market development for sweet sorghum industrial sugars and co-products.

By last December, that collaboration bore fruit, when Delta BioRenewables delivered its first-ever commercial-sized batch of sweet sorghum juice to the Commonwealth Agri-Energy plant in Kentucky.

Kentucky has set itself as something of a center for sweet sorghum. In the summer of 2012, Southeast Biofuels was spotted promoting sweet sorghum in the Kentucky legislature as the Interim Joint Committee on Agriculture and Small Business meets. The company had at the time just produced over a million gallons of ethanol from sweet sorghum, and was developing a processing unit to fit on a tractor trailer, suitable for a small farm operation.

The bottom line

The real culprit here is fast-falling hectares per trial. Had the industry been recording the kind of averages that Monsanto delivered in 2011, we’d be looking at 50,000-80,000 hectares and investor sentiment would be quite different.

But “greater-than-expected variability” in the yield data is going to create a bottleneck for the sweet sorghum developers — now just a drag on Ceres’ share price, but a drag on the upside in Brazilian ethanol margins if they cannot access the 60-day additional harvest window in the next few seasons.

And, with export opportunities constrained, producers will be watching the margins and yields more closely than in boom times when capacity and production is all that matters.

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

November 25, 2013

Capstone Infrastructure: How Bad Is The Worst Case?

Tom Konrad CFA

Disclosure: I have long positions in MCQPF and AQUNF.

Capstone Infrastructure Corporation (TSX:CSE, OTC:MCQPF) has been trading at a significant discount to its peers because of a  power supply agreement which expires at the end of 2014.  Capstone is seeking a new agreement with the Ontario Power Authority for its Cardinal gas cogeneration facility, a process which has taken much longer than management expected.

The cardinal Cardinal plant currently accounts for about a third of Capstone’s revenue and a quarter of earnings before interest, taxes, and depreciation (EBITDA), but two-thirds of distributible income.  The high fraction of distributible income is because Cardinal’s debt has been paid down over the term of the expiring power supply agreement.  This makes income from Cardinal (and the terms of a new power supply agreement) crucial to maintaining Capstone’s dividend.

Capstone Infrastructure Corp.'s Gas Cogeneration facility in Cardinal, Ontario.

In the company’s third quarter conference call, we learned a few tidbits which point to how and when the negotiations might be resolved.


In terms of timing, the Ontario Power Authority (OPA) is expected to release its new Long Term Energy Plan before the end of the year.  It seems unlikely that the OPA would announce a new contract with Capstone before releasing the plan, so I expect that investors will have to wait until 2014 before we have any news on an actual contract.

The OPA did finalize a 20 year power supply agreement with TransAlta Corporation (TSX: TA, NYSE:TAC) for that company’s similar gas cogeneration facility in Ottawa.  That facility’s previous agreement was expiring at the end of 2013.  If Capstone’s negotiations follow a similar pattern, we would expect a new agreement for Cardinal in the middle of next year.

Likely Terms

TransAlta’s Ottawa power supply agreement is interesting in terms of its substance, in addition to its timing.  Under that deal, the plant “the plant will become dispatchable. This will assist in reducing the incidents of surplus baseload generation in the market, while maintaining the ability of the system to reliably  produce energy when it is needed.”

For similar reasons, the chance of Capstone and the OPA failing to come to any agreement seems minuscule.  The Ontario government has committed to no new nuclear and an increasing dependence on renewables and efficiency.  No new nuclear means lower overall supply, and more renewables means more variable power supplies, adding to the value of flexible plants such as Cardinal and Ottawa.

The Ottawa agreement provides for TransAltas’s plant to ramp up and down in response to the needs of Ontario’s power system.  Dispatchable plants receive two types of revenues from the utility: payment for energy produced, and a capacity payment based on the plant’s ability to respond to system needs.

Cardinal is also a flexible facility, so it makes sense that Cardinal’s power supply agreement would also provide for the plant to become dispatchable.  New capacity payments would go some way to making up for the lost revenue when Cardinal no longer operates as a baseload facility.  In 2012 and 2013, Cardinal has been generating power nearly flat-out, running at a capacity factor equal to over 90%  of its theoretical maximum.

The capacity factor of dispatchable facilities varies greatly.  ”Peaker” plants tend to be relatively inefficient facilities with high operating costs which operate for only a few hours or days each year, when load is highest and all other facilities are already operating.   More efficient cogeneration plants such as Cardinal and Ottawa are typically used to serve intermediate load.  Such plants are dispatched whenever demand is high or moderate or when renewable power production is low.  They are switched off at times of low demand or high production from renewables.  Such plants usually operate at capacity factors between 30% and 70%, with more efficient, low-cost facilities operating at higher capacity factors.  Cogeneration facilities tend to be among the most efficient.


I modeled three scenarios for Capstone’s 2015 earnings under a new power supply agreement.  For a worst case, I assumed that Cardinal would operate at a very low 15% capacity factor.  My “expected” case would have Cardinal operating at a 55% capacity factor, and my “high” case would have it operating at a 65% capacity factor.

I then factored in moderate revenue and earnings growth from Capstone’s many development projects and capital investments to arrive at some rough estimates of Capstones future capacity to pay dividends.  The company measures this capacity with “Adjusted Funds From Operations” or AFFO, and aims to pay out roughly 70% to 80% of AFFO as dividends.

Capstone Metrics.png

Starting with Capstone’s recent share price of C$3.66, I assumed that management would maintain the current C$0.075 quarterly dividend through 2014, and pay out 80% of AFFO in 2015.

Although income and AFFO will drop with the new contract, the market is already pricing in a dividend decrease.  Capstone currently trades at a dividend yield over 8%, while the closest comparable, Algonquin Power and Utilities (TSX:AQN, OTC:AQUNF,) yields 5.2%, so I assumed Capstone’s yield would fall to 6% in 2015, given the increased certainty embodied in a new contract.

In my expected scenario, this produced a C$4.70 stock price, while my worst case scenario had the stock fall to C$3.08, and the high case produced a stock price of C$5.06.  The worst case scenario produced only a tiny net loss (less than 1%) over the next two years because of Capstone’s high dividend yield, while the Expected and High scenarios produced 45% and 55% two-year returns, respectively.

  Capstone Share
Price and Div Est.png


Ontario’s plans to meet its electricity needs without new nuclear power, and with the increasing use of wind, solar, and energy efficiency mean that the flexibility of Capstone’s Cardinal cogeneration power plant is increasingly valuable.  The Ontario Power Authority is likely to reach a supply agreement with Capstone to provide for Cardinal to be operated as a dispatchable facility.  Such an agreement is likely to be finalized well in advance of the expiration of Cardinal’s current agreement at the end of 2014.

Under such an agreement, Capstone’s income from Cardinal will almost certainly decline.  However, the market currently seems to be pricing in a worst case scenario under which Cardinal operates only a fifth of the time.  Under a more likely scenario, Capstone should be able to maintain its current C$0.30 annual dividend.  If that happens, the stock should appreciate for a two year total return of between 35% and 55%.

This article was first published on the author's Forbes.com blog, Green Stocks on November 15th.

Disclosue: Long CSE, AQN,NPI,BEP,INE,RDZ

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 sour

November 23, 2013

Alternative Energy Funds In The Lead

By Harris Roen

Alternative energy MFs and ETFs posted record gains in the past 12 months. Guggenheim Solar (TAN) and Market Vectors Solar Energy (KWT) are the top two performers out of more than 1,500 ETFs. Firsthand Alternative Energy (ALTEX) and Guinness Atkinson Alternative Energy (GAAEX) are in the top ten for over 28,000 mutual funds.


Mutual Funds

Returns overall have been spectacular for alternative energy MFs. Even the lowest performer is up 27% in the past 12 months. The best performers are those strongly invested in solar, specifically ALTEX and GAAEX, as the solar sector has been on an absolute tear. It should be noted, however, that some of these high fliers are still down from their highs of several years ago.

A new fund has been added to our ranking list, Green Century Balanced (GCBLX). It does not specifically invest in alternative energy companies, but instead has a broader green investment agenda. Its principal strategy is to invest in “environmentally responsible and sustainable U.S. companies, many of which also make positive environmental contributions.” There is a good Reuter’s article on GCBLX, recommending it for the fossil fuel divestment crowd. It comes onto the alternative energy mutual fund list as a Rank 2 (funds are ranked from 1 to 5, with 1 being the best).


Exchange Traded Funds

Returns for alternative energy ETFs have been strong, like their MF counterparts, though gains have been much more variable. TAN has returned an astounding 240% for the year, and Market Vectors Solar Energy (KWT) gained 185%.

Of the two funds, TAN is higher ranked due to several factors. TAN is a much larger ETF, managing over $400 million as compared to about $30 million invested by KWT. This makes TAN a more stable investment platform. Additionally, TAN has somewhat better fundamentals in its underlying assets when looking at price/sales and forward price/earnings ratios.

On the down side, three of the alternative energy ETFs show a loss for the year. iPath Global Carbon ETN (GRN) is down by more than half, reflecting the continued struggle in European carbon markets.


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.

November 22, 2013

SunTech's Sunset Illuminates State Ties

Doug Young 

Sunset for Suntech. Photo by Tom Konrad

As the sun rapidly sets on former solar pioneer Suntech (OTC: STPFQ), I thought I’d take a look at the latest reports that show just how closely the company relied on state support. At the same time, another major development has seen Suntech’s shares finally de-list from New York, where they have traded since its 2005 IPO. The de-listing is something that should have happened long ago, even though investors continued to bet that Beijing would rescue Suntech ever since the company was forced into bankruptcy back in March.

I’m suddenly feeling a bit nostalgic while writing this, as I suspect it will be one of the last chances I have to write about Suntech before the company officially ceases to exist. But I also suspect we’ll probably see at least 1 or 2 more flare-ups before the curtain drops, providing an appropriate final burst for this former solar pioneer that later became a poster child for creative accounting that is relatively common among US-listed Chinese companies.

Let’s start with a look at a new report that shows just how closely Suntech was tied to state support. Such strong support was one of the main factors for the sector’s build-up over the last decade, which resulted in massive oversupply that sparked a downturn that began more than 2 years ago and is only finally starting to subside now. That downturn claimed numerous victims in the US and Europe, and Suntech is the biggest victim in China.

According to the latest report, Suntech’s 2 largest creditors were both big state-run lenders, which often make their decisions based on orders from the central and local governments and provide loans at rates well below market levels. The largest of Suntech’s creditors was China Development Bank, one of Beijing’s main policy lenders, which held about 2.4 billion yuan ($393 million) in Suntech debt, or about a quarter of the company’s total debt of 9.5 billion yuan. (English article) The second biggest creditor was the Bank of China’s (HKEx: 3988; Shanghai: 601988) branch in the city of Wuxi, Suntech’s hometown, with nearly 2 billion yuan in debt.

Some quick math will show that these 2 banks alone account for nearly half of Suntech’s debt, though it’s unclear to me if the 9.5 billion yuan figure also includes the company’s international bonds. But regardless, the fact that 2 big state-owned banks lent $720 million to Suntech looks like strong evidence to support foreign competitors’ claims that Beijing provides unfair support to its solar panel makers. Those claims led to anti-dumping investigations by the US and EU, both of which found that China did indeed provide unfair support to its solar panel makers.

From there, let’s look quickly at the other major development, which saw Suntech’s shares officially moved to the over-the-counter market earlier this week from their former listing on the New York Stock Exchange. The NYSE officially cited uncertainty over Suntech’s ability to file its annual report on time for the de-listing. (English article) But I suspect that stock exchange officials also felt guilty for not pressing harder to de-list Suntech shares earlier, as most companies are usually instantly de-listed when they enter bankruptcy reorganization.

Investors continued to value Suntech at more than $100 million throughout the bankruptcy process, with its shares trading above the minimum required $1 level for most of that time. They finally began to sink last week after it became clear the company was being liquidated, though they suddenly rallied 40 percent in over-the-counter trade in the latest session. Personally speaking, I’ll be happy when the shares finally stop trading completely, formally ending Suntech’s life as a listed company.

Bottom line: The latest reports on Suntech’s debt highlight its strong government support, even as its New York-listed shares loom closer to becoming worthless.

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.

November 21, 2013

Hannon Armstrong Yeild On Track For 7% in Q4 With More To Come

Tom Konrad CFA

hannon armstrong logo

After the close on Thursday, November 7th, Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) declared third quarter earnings.  Results were in-line with my, and other analysts’ expectations: Earnings per share (EPS) of 14 cents, and a declared dividend of 14 cents as well. This more than doubled the second quarter’s 7 cent EPS and 6 cent dividend. Note: I have a large long position in HASI.

HASI remains on track to reach managements’ dividend target of “over 7% of the $12.50 IPO price” (22 cents a quarter,) and provided some additional guidance for future dividends.  Brendon Herron, HASI’s Chief Financial Officer said that investors can expect the dividend to grow between 13% and 15% for the next couple of years, based on the 22 cent fourth quarter target.

Putting some numbers to the dividend guidance, at Friday’s closing price of $11.69, a 22 cent fourth quarter dividend would equate to a 7.5% annualized yield.  13% to 15% annual dividend growth would provide an annualized yield of  8.5% to 8.6% in Q4 2014, and 9.6% to 10% in 2015, assuming the share price does not increase.

Why The Decline?

Despite delivering on the company’s promises, the stock fell 5% from its Thursday $12.30 close, returning to levels it had last seen in mid-October, as it recovered from early-October lows.  I attribute those lows to investor worries about the federal government shut-down.  (Incidentally, I was buying in early October.  While much of HASI’s business is with the federal government, federal cost cutting is more likely to be a driver of HASI’s money-saving investments than a drag in the long term.  In the short term, federal projects may be delayed, but the company can make up the difference from other sectors in its vast pipeline.)

The most likely reason for the decline was selling by IPO investors.  Approximately 2 million, or 13% of outstanding shares, became eligible for sale in October.  Many of these IPO investors have doubtless been disappointed that the company has been consistently trading below the $12.50 IPO price, and were hoping the fourth quarter earnings announcement would provide an exit.

With an average share volume of less than 100,000 shares, it would not take much selling by short term IPO investors to drag the stock price down for several weeks.  In contrast. the long term income investors who are likely to be attracted by HASI’s future yield tend to move more slowly.  I expect they will eventually bring the price back up as they recognize the value of HASI’s current 4.8% annualized yield and forward 7.5%+ yield, but we can’t expect this to happen overnight.

Note that company insiders are still restricted from selling.  However, I don’t expect them to sell many shares when they are released from lock up.  According to SEC filings, company officers (most notably the CEO, Jeffery Eckel) have purchased over 50,000 shares since the IPO at prices between $10.99 and $11.76.  I would not be surprised if they are buying today.


Hannon Armstrong’s fall on Friday was most likely due to selling by IPO investors who were released from lock-up restrictions in mid-October.  If only a fraction of these investors try to sell their shares over the next few weeks, it could easily drive the stock down further given HASI’s low trading volume.

Long term investors and traders willing to hold a position for at least six months should take note.  Given the extremely reliable nature of its investment income, buying Hannon Armstrong at any price below $12 is not only likely to produce some capital gains as they reach their full dividend, but the 14 cent thirdquarter dividend should provide a floor for the stock price.  At $12, its annual yield is  4.7%, which is already in line with comparable US-listed stocks.  If selling by short term IPO investors is driving the stock down, it is a buying opportunity, not a reason to panic.

This article was first published on the author's Forbes.com blog, Green Stocks on November 15th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 20, 2013

SolarCity – Crisis or Opportunity?

By Harris Roen

The latest earnings numbers released by SolarCity (NASD:SCTY) show a mixed bag of results. Total revenues have been rising for the past 4 quarters, and the number of customers SolarCity is signing up continues to soar. All is not rosy, though, as operating expenses relative to net loss continue to increase. This article dives into the reported numbers, looks at important customer trends, and asks whether SolarCity is still a stock worth investing in.


Revenues: Not a record, but steady growth

Revenues for the third quarter came in strong for SolarCity, at $48.6 million. This is a 52% increase in revenues over the same quarter last year, though it is still far below the record set in June 2012. Still, income has been rising in a straight-line direction for the past four quarters, and fourth quarter revenues are projected to be steady or rising.

Net income, on the other hand, has not fared so well. The first three quarters of 2013 have shown large losses. SolarCity reveals that in the most recent quarter it hemorrhaged $34.6 million. Total current assets have remained steady for the company since the last quarter at around $312 million. However, the cash portion of those assets dropped 17% to $133 million. So while it looks like SolarCity can sustain losses for a few more years on its current tack, this trend of negative net income must turn around in order for the company to remain viable for the long-term.

Revenues projected to rise

Revenues are projected to continue a steady increase for SolarCity on an annual basis. According to the company’s latest guidance, money coming in from leases and sales are expected to grow to between $157 million to $163 million for all of 2013. That means about a 25% increase over 2012 revenues, and about five times the revenues of just three years ago.
  SCTY Revs

Expenses continue to increase

Since the revenue side of the equation is solid for SolarCity, high expenses are the cause of continued losses for the company. Total operating expenses deepened for each quarter of 2013, now at $46.2 million. So far for 2013, expenses are greater than for all of 2012.

SCTY losses 30123q3

Know your customer

In order to understand when a mass-market company like SolarCity is likely to become profitable, one must understand the nature of its customer base. Questions to be answered include how fast is the customer base growing, how much does it cost to get a new customer, and how much money does each customer generate.

SCTY Clients

Customers have been added at a steady clip the past three quarters. In fact, the third quarter of 2013 added almost twice as many clients as were added in the first quarter of the year. Already year-to-date, SolarCity has added almost as many customers as it did in the banner year of 2012.

Revenues per customer, however, have remained flat, at around $600 per customer per quarter. (Note that revenues per customer look much larger for the annual data on the chart, but those numbers account for a full four quarters of income. When revenues per customer are projected out for all of 2013, it lands in the $2,500 range).

It is a bit hard to tell from the chart, but net loss per customer has been shrinking in 2013. It is down 30% since the first quarter, from a loss of $601 per customer to a loss of $421 in the third quarter. Likewise the acquisition cost per customer is dropping, down 29% from the first quarter to just under $2,000. These are both positive trends, and if they continue, will play an important role in bringing about profitability.

Is SolarCity still a good investment?

Though it is in the solar business, SolarCity is essentially a finance company. It uses billions of dollars of variable interest entity (VIE) investments, long and short-term debt, tax credits and stockholder equity to create leases, notes and other equities to generate income. As I have stated before, SolarCity as an energy stock 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. Because earnings results were good but not stellar, the stock has given up about 15% of its value from its high a week ago.

Having said that, there is no doubt that SolarCity is a well-positioned company in the growing field of solar installs. Last quarter alone it deployed 78 megawatts of photovoltaics. That is greater than what was installed in all of 2011, and about 70% of all megawatts SolarCity installed in 2012. If acquisition cost per customer drops below the $1,000 range, and if the company continues to grow its bottom line to swing net revenues per customer in a positive direction, then current prices for SolarCity will likely be justified. As such, I see SolarCity as a long-term hold for the investor that can stomach volatility, rather than a traders stock.


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.

November 19, 2013

Earnings Season For Ten Clean Energy Stocks

Tom Konrad CFA

The third quarter earnings season has been quite eventful for my Ten Clean Energy Stocks for 2013 and six alternative picks model portfolios, so much so that writing about them has taken a back seat to keeping up with the announcements.  There were a number of earnings disappointments and earnings announcements which were in line with my expectations but the market treated like disappointments. These resulted in an overall decline of 2.5% for the portfolio since the last update, even as my industry benchmarks, the Powershares Wilderhill Clean Energy (PBW) and my small cap benchmark (IWM) were up 1.0% and 3.9% over the months since October 15th.
  10 for 13 Nov.png

Individual Stocks

The only good news came from ground-source heat pump manufacturer Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF.) Waterfurnace reported earnings up 51% compared the previous-year period.  The strong results arose from a large increase in sales to Canada, as that market recovered from the end of a federal incentive program in March 2012.  Also benefiting earnings was a decrease in operating expenses due to successful cost reduction efforts in 2012.  Analysts at Canaccord Genuity raised their price target for Waterfurnace from C$25 to C$29 in response to the results.  Waterfurnace rose 18% for the month.

Leading environmental services firm Waste Management (NYSE:WM) also rose significantly, up 10% for the month, despite the fact that earnings were in line with analysts' expectations.  While I consider Waste Management a long term hold as a reliable dividend stock, I've taken advantage the recent price appreciation to increase my income from the position by selling covered calls.

The market reacted negatively to strong earnings at utility demand-side management contractor Lime Energy (NASD:LIME).  The company has been making excellent progress shedding unprofitable business lines and focusing on its utility business, with revenue from continuing operations jumping 55% and gross profit up 125% compared to the comparable quarter a year ago.  Unfortunately, liquidity still remains a significant issue at Lime, despite its September raise of $2.5 million and conversion of debt into preferred stock in September.  The liquidity section of Lime's third quarter report states, "While it is possible that our current capital will be sufficient to carry us until we reach profitability, it is also possible that we will need to raise additional capital before our cash flow turns positive and we are able to internally fund our operations." 

Investors are most likely selling in anticipation of another round of funding which could further dilute existing shareholders.  The company is fortunate to have a number of large shareholders who see the potential of its utility business and have been willing to repeatedly step up to cover its cash needs.  Given the strength of its utility business, I anticipate that they will only need to come back for one more round.

Although turnkey Energy Service Company (ESCO) Ameresco, Inc. (NASD:AMRC) continued to grow its backlog at a 15% rate compared to the previous quarter, conversion rates continue to disappoint.  Last quarter Ameresco’s CEO, George Sakellaris stated that he saw conditions improving, but revenue grew only 9% year over year, in large part due to five delayed renewable energy projects and customer delays in both the US and Canada.  Historically, it has taken 6 to 12 months for Ameresco to convert projects in the backlog to revenue.

Although this is the fifth consecutive quarter that Ameresco has missed earnings, I don't think there is anything fundamentally wrong with its business model.  Navigant predicts that the energy service business will grow 8% next year and reach $8.3 billion by the end of the decade from $4.9 billion this year.  Ameresco is already seeing a pick-up in both its revenue and backlog, while rivals such as Johnson Controls (NYSE:JCI) have yet to see improvement.  I took the opportunity of the sell off to add to my position.

Kandi Technologies (NASD:KNDI)

Chinese EV and off road vehicle manufacturer Kandi Technologies has been growing its legacy off road vehicle business rapidly, but sales of EVs have yet to take off, with only 494 sold during the quarter.  I expect the pace of EV sales to pick up significantly in the fourth quarter.  EV sales should be driven by now that China's much-delayed subsidy for "New Energy Vehicles" has been renewed.  This seems to favor makers of low-speed electric vehicles like Kandi.  The roll-out of a public EV sharing system using Kandi vehicles in the city of Hangzhou should also contribute to EV sales this quarter, as could its joint venture to build EVs with Geely Automotive.

On the other hand, I found the announcement on October 28th that Kandi was purchasing $30.3 million worth of batteries for the roll-out of the Hangzhou public EV sharing system concerning.  Under the original agreement, the batteries were to have been supplied by Air Lithium (Lyoyang) Co. Ltd.and paid for by the local utility.  The capital-light model of getting others to pay for the most expensive EV component, the battery, was one of the things which attracted me to Kandi in the first place.  Now Kandi seems to be buying the batteries itself.
With current liabilities already exceeding current assets by $133 million to $89 million, I would not be surprised if Kandi has to raise more capital soon in order to increase the pace of EV sales significantly.

I still hold the short $10 KNDI calls expiring in December I mentioned in the last update.

Alterra Power (TSX:AXY, OTC:MGMXF)

Diversified renewable power operator and developer Alterra had a strong quarter, producing a profit of 3 cents a share for the quarter compared to 2 cents for the prior year.  More importantly, EBITDA is rising as a result of Alterra's investment program.  At C$0.30 a share, the company has an Enterprise Value of only 9-10 times 2013 EBITDA.  More mature Canadian power producers trade Enterprise Values of at 15 to 20 times EBITDA.  Alterra's low multiple might be understandable if it were unable to cover its debt payments, but these are comfortably below Alterra's free cash flow.

Six Alternative Clean Energy Stocks

In the interest of getting this out in a timely manner, I plan to write a separate follow-up article discussing the results of the stocks in my alternative portfolio.


DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 18, 2013

Renewable Fuels Proposal: "Complete Capitulation to Big Oil"

Jim Lane

Obama, in trouble on healthcare, sounds the retreat on renewable fuels; industry groups aghast as EPA targets next-generation, non-food biofuels for biggest cuts; slashes corn ethanol also.

Major push-back expected following “complete capitulation to Big Oil”.

What are the political, economic drivers? What’s the impact, and how will industry respond?

In Washington, the EPA released its 2014 proposed standards and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original Energy Independence & Security Act.

The announced proposed volumes met with united outcry from biofuels trade associations, and sniping criticism over the continued existence of the Renewable Fuel Standard from food and oil industry groups. Oil refiners were remarkably silent on a day which handed them a significant regulatory victory.

As analysts began to pore over the detail, the EPA’s proposal won support from Jason Bordoff, former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council — and senior Piper Jaffray equities analyst Mike Ritzenthaler wrote that producers would find work-arounds or alternative markets to maintain revenues and cash-flow.

In today’s Digest, we have a complete wrap-up of reaction, plus as look at the proposed rule, the EPA’s rationale, the advanced biofuels vs corn ethanol dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.


The proposed rule

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2014
Cellulosic 0.017 1.750
Biomass-based diesel 1.280 1.000
Advanced biofuel 2.200 3.750
Renewable Fuel 15.210 18.150

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 13.010 14.400

Overall, the reductions from statutory volumes are:

Advanced biofuels vs statute: -41.33%
Corn ethanol vs statute: -9.7%

Comparing the advanced portion to the overall proposed rule

Gallons of advanced biofuels above the biodiesel mandate: 280 million gallons (ethanol equivalent)
Translated into gallons of renewable diesel: 164 million gallons
Current US renewable diesel capacity at Diamond Green Diesel and Dynamic Fuels: 210 million gallons.

The EPA’s rationale

EPA writes: “The proposal seeks to put the RFS program on a steady path forward – ensuring the continued growth of renewable fuels while recognizing the practical limits on ethanol blending, called the ethanol blend wall.”

The blend wall refers to the difficulty in incorporating increasing amounts of ethanol into the transportation fuel supply at volumes exceeding those achieved by the sale of nearly all gasoline as E10 (gasoline containing 10 percent ethanol by volume).

How does the proposed rule compare to the previously leaked EPA document that contained three options ?

Statutory Option 1 Option 2 Option 3 Proposed
Cellulosic 0.023 0.017 0.023 0.023 0.017
Biomass-based diesel 1 1.28 1.28 1.28 1.28
Advanced biofuel 3.75 2.84 2.02 2.21 2.2
Renewable Fuel 18.15 15.21 15.21 15.21 15.21

Corn ethanol 14.4 12.36 13.18 12.99 13.01

Bottom line: it’s virtually the Option 3 as previously leaked, except for a reduction in the cellulosic volumes towards the bottom end of the expected 13-36 million gallons production range, and a cosmetic adjustment to bring corn ethanol above the 13 billion gallons range with an adjustment of 10 million gallons.

Beyond the blendwall, the hidden issues

EPA writes: “Although the production of renewable fuels has been increasing, overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in 2007.”

In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.

On a more speculative basis, we see here an Obama Administration very much on the defensive over its legislative program. In deep trouble on Obamacare, the White House appears to have opted to capitulate on energy policy, so as to preserve political capital.

Options in the courts: Suing to enforce the 2014 statutory numbers

It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. It will be interesting to see if the RFA sues to maintain the corn ethanol mandate and potentially leaves advanced biofuels facing an even stronger set of cuts in order to make room for more corn ethanol.

By their statutory authority on cellulosic fuels (not in any way subject to a challenge on their powers under RFS2, but could have been open to challenge based on the gallonage), they could have waived down the celuloisic portion to 17 million gallons based on available fuel, and waived the rest of the standard accordingly down.

The advanced biofuels pool would have been reduced to 2.013 billion gallons, and corn ethanol would have stood at something like 14.387 billion gallons. The agency too steps to decrease the corn ethanol pool — and to increase the advanced biofuels pool slightly.

Why not balance less corn ethanol with more advanced biofuels?

The fear — rightly or wrongly — is that the advanced pool will be drowned in low-cost, imported ethanol that qualifies for the advanced biofuels pool — and exacerbates the blendwall issue that it sees in the marketplace. So, they have increased the advanced pool, but kept it quite close to the biobased diesel rule.

At the end of the day, there’s not much production out there, outside of the biomass-based diesel capacity (representing renewable diesel and biodiesel) and the cellulosic fuels capacity. At scale, there are some providers such as Aemetis that can produce qualifying advanced ethanol at scale using the milo-biogas pathway, and there’s sugarcane ethanol.

The major producers, potentially, in the non-cellulosic, non-diesel market are the biobutanol producers, and there are not indications of major capacity expansions here in 2014.

Why is industry freaking out?

RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.

Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.

So, it’s a distribution war. Conventional fuels are protecting their production by protecting their distribution. Renewable fuels haven’t built any, hardly, to speak of. Congress gave every indication that they would force conventional fuels, via mandate, to find distribution solutions are face exploding RIN costs — as certain RINs became attractive to predatory trading — and perhaps even self-serving trading.

When RIN costs exploded, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.

Industry reaction

Economic Analysis

Mike Ritzenthaler & Michael Cox, senior energy analysts, Piper Jaffray

“The EPA released the highly anticipated proposal for the 2014 RFS mandates this afternoon that was largely in line with the leaked proposal in early October. For 2014, the EPA proposes a 1.28 bil gal biodiesel mandate, which is flat to the 2013 renewable volume obligation (RVO), intends to manage the corn ethanol mandate to the blendwall, proposing a ~13 billion gallon RVO, and proposed a 17 million gal cellulosic mandate.

We expect that ethanol RINs will decline to more historical levels in the single-digit cent range, while the 1.28 bil gal biodiesel mandate will hold a floor for biodiesel RINs in order to subsidize the marginal independent soybean oil producer. Although we expect an initial negative reaction by investors for the entire space, we believe our estimates for REGI and GPRE are intact despite the lower potential mandates and that GEVO and KIOR are less impacted than first generation biofuels.

Do not expect large impact to first generation producers or grain market. We do not believe a flat biodiesel mandate or lower ethanol RINs will negatively impact REGI since the biodiesel RIN will adjust in order for the marginal independent soybean oil producer to breakeven. Out of the 1.28 bil gal, we expect more than 200 mil gal will be made up by independent soybean oil refiners and so REGI’s low cost position allows them to continue operating at normal capacity.

Additionally, we believe fluctuations in RINs prices will largely be offset by adjustments in feedstock costs, as we have discussed in previous research. Current favorable fundamentals in ethanol, where forward curves suggest a strong discount between ethanol and gasoline through 2014, will support higher discretionary blending and strong ethanol margins despite the lower mandate.

For the grain markets, we expect that the lower corn ethanol mandate will initially weigh on corn prices to reflect less corn consumption (the difference between the proposed 13 bil gal and 10% of the expected gasoline consumption according to the EIA represents approximately 115 mil bu of corn), but lower grain prices will likely drive higher production for the export market, ultimately resulting in comparable levels of ethanol production and corn consumption.

As it pertains to Gevo and KiOR, the impact is less dramatic than for the first generation producers. For Gevo, we have long viewed fuels as secondary to specialty chemicals in terms of relative importance. Fuels can provide market/volume stability as capacity ramps and quality improves – but the more attractive margin pools clearly fall within chemicals and butene derivatives, both of which have no RIN sensitivity. As a result, we do not see lower RIN prices as a material negative for Gevo from that perspective.

Since KiOR blendstock does not face blendwall complications (generally KiOR’s fuels support the EPA’s policy objectives), we view the 8-30 million gallon range (17 million gallons proposed) for cellulosic fuels as more than adequate to support KiOR’s objectives for 2014.

We do not see any material effect on either AMRS or SZYM stock, since those companies are focused on specialty ingredients, the production assets are located in Brazil, and the proposed mandates are not favorable to advanced fuel imports from Brazil.

Policy analysis

Jason Bordoff, Director of Columbia University’s Center on Global Energy Policy and former Special Assistant to President Obama and Senior Director for Energy and Climate Change at the National Security Council.

“The EPA’s announcement today that it is lowering the volume of ethanol that the fuel industry must blend into the U.S. gasoline supply marks a notable shift in the Administration’s biofuel policy. This is the right move as it acknowledges a drastic change in the U.S. energy outlook since the renewable fuels mandate was put in place.

“The proposal would lower the ethanol mandate to around 10 percent of the fuel supply, which is in line with a policy judgment that the costs of building out a fuel infrastructure capable of handling more than 10 percent ethanol are not worth the benefits if the ethanol in question will largely come from corn, or be imported from Brazil, as most advanced biofuel mandated by the RFS has been in recent years.

“The proposed rule included an aggressive target for cellulosic ethanol, reflecting a judgment that if there is a breakthrough there, it would be a game changer for ethanol both economically and environmentally that could justify expanding our ethanol fueling infrastructure. Moreover, if the EPA hadn’t acted to ease the mandate, it is possible that Congress would have gotten rid of the mandate altogether, which would have eliminated the possibility that such a breakthrough might actually happen one day.”

Biofuels Trade Associations

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section

“The proposed rule released today turns the logic of the RFS on its head and could significantly chill investments in advanced biofuels projects. We will focus over the immediate comment period on convincing the administration to right the course on this policy.

“The cost of complying with the RFS rose for some parties this year because they dug their heels in against allowing renewable fuels into the market. Other participants in the program have pursued a balanced strategy toward compliance. Attempting to lower the cost of compliance for those who made bad business decisions simply guts the program and renders it ineffective. If the rule is not modified, it is certain to reverse the advanced biofuel industry’s progress. We cannot strangle the advanced biofuels baby in the cradle.”

Mike McAdams, President, Advanced Biofuels Association

“If EPA sticks with 2.2 billion gallons in the final rule, the agency will pull the rug out from underneath the growing advanced biofuels industry. ABFA conservatively estimates that our industry will generate at least 3.5 billion RINs in 2013 that qualify as advanced biofuels, exceeding this year’s target of 2.75 billion advanced RINs by at least 750 million gallons. To continue to support new advanced biofuel production, EPA should set the 2014 advanced biofuel target at 3.75 billion gallons as contemplated by statute. This target can be met and exceeded by current production plus carry-over RINs.

“Now more than ever, all our options remain open – including in the courts and on Capitol Hill – as we pursue that goal.”

Mary Rosenthal, Executive Director of the Algae Biomass Organization

“The way to move the country forward is not to roll back requirements and goals for renewable fuels. There’s no doubt that America’s biofuels industry has been moving the country forward – creating jobs in rural communities, providing choice at the pump and reducing our dangerous dependence on imported oil. The EPA’s decision to require fewer gallons of renewable fuels than last year is a clear step back and sends a chilling signal to investors who are looking to finance the future of the American biofuel industry, putting our economic and environmental security at risk.”

Bob Dinneen, CEO, Renewable Fuels Association

“The Environmental Protection Agency (EPA) today released the proposed 2014 Renewable Fuel Standard (RFS) volumetric requirements. For 2014, EPA is proposing to lower the conventional renewable fuel requirement from the statutory level of 14.4 billion gallons (BG) to 13 billion gallons, and slash the total RFS volumetric requirement from 18.15 BG to 15.21 BG. However, the EPA does not have the statutory authority to lower the total requirement by more than the total reduction in advanced and cellulosic. In addition, the so-called “blend wall” does not qualify under the law as grounds for a “general waiver” of the RFS volumes. The specific conditions needed to effectuate a “general waiver”—severe economic harm or inadequate domestic supply of renewable fuel—are not present.

“By re-writing the statute and re-defining the conditions upon which a waiver from the RFS can be granted, EPA is proposing to place the nation’s renewable energy policy in the hands of the oil companies. That would be the death of innovation and evolution in our motor fuel markets, thus increasing consumer costs at the pump and the environmental cost of energy production. This proposal cannot stand.

Brooke Coleman, Executive Director, Advanced Ethanol Council

“While only a proposed rule at this point, this is the first time that the Obama Administration has shown any sign of wavering when it comes to implementing the RFS. EPA is in the right ballpark for cellulosic biofuels, and we are confident that the final number will be the right one for the industry in 2014. But bigger picture issues must be resolved in the final rule because advanced biofuel investors also pay attention to the big picture.”

“What we’re seeing is the oil industry taking one last run at trying to convince administrators of the RFS to relieve the legal obligation on them to blend more biofuel based on clever arguments meant to disguise the fact that oil companies just don’t want to blend more biofuel. The RFS is designed to bust the oil monopoly. It’s not going to be easy.”

“We hope that the Obama Administration will realize that reasonably higher RIN prices are a good thing instead of a bad thing. Higher RIN prices are a sign that the oil companies are predictably refusing to blend actual liquid gallons of fuel to comply with the RFS. But higher RIN prices are encouraging those unwilling to obstruct on RFS compliance to actually blend more renewable fuels. Investors are starting to see the RIN program drive more demand for renewable fuels with consumer savings at the pump. Now is not the time to depressurize the program.”

Tom Buis CEO of Growth Energy

“Clearly we are disappointed in the initial proposal that was released today. This proposed rule goes directly against the best interests of our nation and American consumers. We are only five years into a 15 year policy that is working and has saved Americans billions of dollars at the pump. Now is not the time to turn back on the progress we have made and ask Americans to pad big oil’s already record profits. In its current form, this rule would freeze innovation or investment in next generation biofuels; reduce production of conventional biofuels; harm our environment and jeopardize savings to consumers. For over 40 years our nation has been held captive by our addiction to foreign oil, the proposed rule if finalized in its current form is a victory for OPEC and Big Oil and a loss for America.”

Leticia Phillips, the Brazilian Sugarcane Industry Association North American Representative

Slashing the 2014 target for advanced biofuels would be a huge step backwards from the Obama administration’s goal of decreasing greenhouse gases and improving energy security. Advanced biofuels, including Brazilian sugarcane ethanol, reduce carbon dioxide emissions by at least 50 percent compared to gasoline, and EPA has traditionally promoted these clean renewable fuels. That is why we are surprised and disappointed that EPA’s proposal minimizes the 650-800 million gallons of sugarcane ethanol Brazil is poised to supply to the United States in 2014.

Brian Jennings, Executive Vice President for the American Coalition for Ethanol

“There is nothing positive that can be said about EPA’s proposal to unnecessarily restrict sales of ethanol-blended fuel in 2014. This proposed rule will increase pump prices, drain billions of dollars from consumer pocketbooks, and transfer billions more to oil company profit statements. EPA’s proposal fundamentally betrays this Administration’s commitment to clean renewable fuels and caves to Big Oil demands to put a ceiling on ethanol use. Using the E10 “blend wall” as an excuse to reduce ethanol use rewards oil companies for doing nothing to comply with the RFS or inevitability of higher ethanol blends, and sets a dangerous precedent by taking the teeth out of the most consequential policy Congress has ever enacted to reduce greenhouse gas emissions of transportation fuel.”

Anne Steckel, NBB’s vice president of federal affairs, National Biodiesel Board

“The growth in domestic biodiesel production dovetails exactly with President Obama’s statement in July of this year that ‘biofuels are already reducing our dependence on oil, cutting pollution and creating jobs around the country. This is why EPA’s action today is so surprising and disappointing. This proposal, if it becomes final, would create a shrinking market, eliminate thousands of jobs and likely cause biodiesel plants to close across the country. It also sends a terrible signal to investors and entrepreneurs that jeopardizes the future development of biodiesel and other Advanced Biofuels in the United States.”

Monte Shaw, Iowa Renewable Fuels Association Executive Director

“Today’s RFS announcement represents the biggest policy reversal of the entire Obama Administration. The EPA proposal turns the RFS on its head, runs counter to the law and is a complete capitulation to Big Oil. The Obama Administration needs to conduct a thorough soul-searching and decide whether they are serious about cleaner fuels, consumer choice, and cutting petroleum dependence, or whether they truly want to adopt the Big Oil status quo. There is still time to restore Congressional intent and common sense before the rule is finalized.”

“It’s not just the absurdity of lowering the 2014 numbers below the 2013 level, with the new waiver framework, in essence, the Administration would be ceding power to the petroleum industry to dictate the level of each year’s RVO based on the amount of infrastructure the petroleum industry was willing to install. That is the exact opposite of how the RFS was intended to work. The RFS is supposed to be a tool for market access, not market restriction.”

Noted producers, suppliers and policymakers

US Agriculture Secretary Tom Vilsack

“The Obama Administration remains committed to the production of clean, renewable energy from homegrown sources, and to the businesses that are hard at work to create the next generation of biofuels.

“It’s important to take a long-term approach to the RFS. Clearly, as Governor of Iowa and as U.S. Secretary of Agriculture, my support for the RFS has been steady and strong. But I also believe that improved distribution and increased consumer use of renewable fuels are critical to the future of this industry.

“I am pleased that EPA is requesting comments on how we can help the biofuels industry expand the availability of high-ethanol blends, and I hope the industry uses the comment period to provide constructive suggestions. Together, we will be able to chart a path forward that maintains President Obama’s strong commitment to an “All of the Above” energy strategy for our nation.”

REG CEO Daniel J. Oh

“We are disappointed by the proposed numbers that are not consistent with the goals of the EPA, the White House, nor Congress when it created RFS2. Nevertheless, REG’s lower cost multi-feedstock business model, network of biorefineries and terminals, and strong position within the industry should allow us to continue to succeed as the markets inevitably adjust to reach a new equilibrium. The proposed numbers do not reflect the positive results the biodiesel industry has provided in terms of record production levels of advanced biofuels, job creation, rural economic development, energy and food security, and environmental benefits. We will continue to advocate with our industry partners for logical increases in the biomass-based diesel and overall advanced biofuel RVOs through the public comment period.. Without such increases in the RVO our Nation will be deprived of present and obvious benefits.”

POET CEO Jeff Lautt

“The EPA’s proposed renewable fuel volumes are well below what the ethanol industry is capable of supplying for American drivers in 2014, and POET plans to address the issue in detailed comments to the agency. America is looking at a possible record corn crop, and the opportunity to offer more affordable fuel options to consumers has never been better. At the same time, cellulosic ethanol capacity is coming online in a large part thanks to significant investment from grain ethanol producers such as POET. The proposed reduction from EPA is troubling, as it not only cuts grain ethanol use below the levels set by Congress, it cuts them to a level below the 13.8 billion that was met in 2013. The Renewable Fuel Standard was created to provide a choice to consumers outside of oil-based fuel.”

Adam Monroe, Novozymes President Americas

“The Renewable Fuel Standard was signed into law to break OPEC’s effects on the nation: high oil and gasoline prices, American dollars going offshore and environmental consequences. The only way to break foreign control on oil prices and the nation is to introduce a competitive alternative. The RFS was designed as a two-part strategy: Companies like ours would bring breakthrough renewable fuel technology to market, which we’ve done. Oil companies were then required to blend it into the nation’s fuel mix – which they’ve naturally fought at every turn.”

James Moe, Chairman of the Board, POET-DSM Advanced Biofuels

“Next year, for the first time in history, the U.S. will produce meaningful volumes of cellulosic ethanol. With a number of new plants coming online including POET-DSM’s Project LIBERTY, we can finally say that commercial cellulosic ethanol production has arrived. Unfortunately, the latest Renewable Volume Obligations from the EPA underestimate the volume of cellulosic ethanol that will be produced next year. We understand the intention to not overestimate capacity, but the proposed numbers released today hurt efforts to expand this cutting-edge technology and deny Americans new alternatives to fossil fuels. We ask the EPA to continue to engage closely with the cellulosic biofuels industry during the comment period so that we can demonstrate our confidence in our ability to scale up these processes so that the Final Rule uses the best information possible to support the growth of this new and important industry.”

Industry opponents

Robb MacKie, President & CEO, American Bakers Association

“The baking industry recognizes EPA’s proposal lowering the corn-based ethanol mandate. However, this does not go far enough. Corn-based ethanol is a factor that has led to decreased wheat acreage in the US over the past 30 years and tighter food supplies around the world.”

Mark Dopp, SVP of Regulatory Affairs and General Counsel, American Meat Institute

“The EPA decision to reduce the corn ethanol mandate is long overdue. While this is a positive step, the fact remains the RFS is a flawed policy that requires Congressional action. Even with a record corn crop expected this year, the damaging ripple effect of this defective policy has been moving through the meat and poultry complex for the past several years. The time for Congressional action is now.”

Mark Allen, President, International Foodservice Distributors Association

“Why must restaurant operators and their customers, the American consumer, continue to pay higher food prices due to the corn ethanol mandate in the Renewable Fuel Standard? It is time to end the misguided policy of using corn for fuel.”

Michael J. Brown, President, National Chicken Council

“While we are thankful and support the action EPA is taking today, its timid adjustment reconfirms the program is broken beyond repair. This is a good first step, but ultimately, Congress must act. Congressional action to repeal the RFS remains the most viable pathway to allowing all users of corn to have equal standing in the marketplace.”

Rob Green, Executive Director, National Council of Chain Restaurants

“The Renewable Fuel Standard has wrought havoc on food retailers, restaurants, franchisees and operators, as well as food producers, and suppliers. However, the ultimate losers are consumers. Study after study has shown that the corn ethanol mandate has artificially driven up commodity costs by billions of dollars annually, and with it, consumer prices. Today’s proposal by the EPA reaffirms our steadfast belief that Congress needs to repeal the RFS mandate once and for all.”

American Energy Alliance President Thomas Pyle

“The American Energy Alliance welcomes today’s better-late-than-never announcement that the EPA will scale back the ethanol mandate for next year. With this ruling, even the EPA now recognizes that this program is flawed and fails to take into account existing market realities. Today’s action by the EPA, however, does not take away the need for Congress to act quickly to repeal the law. With this ruling, the “blend wall” may not immediately be hit, but the real problems for consumers have not gone away.

“With this RPS ruling, the EPA is still requiring the production of millions of gallons of phantom cellulosic biofuel, an 800 percent increase from the 2013 levels that were actually produced. Further, the 2.2 billion gallon mandate for “advanced biofuel” is especially absurd considering the practical result is we are merely swapping Brazilian sugarcane ethanol with U.S corn based ethanol in the marketplace.

Alex Rindler, Environmental Working Group Policy Associate, said:

“EPA’s proposal recognizes that the RFS is on a collision course with reality. In order to bring alternative biofuels to the market, Congress must permanently reform the program to eliminate the costly and environmentally destructive corn ethanol mandate. Corn ethanol has clearly failed to produce the benefits it once promised, and has proven to be disastrous for consumers and the environment.”

Comment period

Once the proposal is published in the Federal Register, it will be open to a 60 day public comment period.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher ethanol blends such as E15 or E85. This would contribute to restoring gallons lost in the overall renewable fuels pool — and, essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production capacity, which should be a no-brainer, but also convince EPA that production capacity can and would translate into actual production — especially given that the $1 biodiesel tax credit, which helps drive biodiesel sales — expires at the end of the year.

The new EPA view, summarized

The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution. Rather, the EPA opts for a more passive role of providing a market for those capacities that are, in fact, built – based on incremental, if any, changes in infrastructure.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable fuels to shift strategies more towards driving consumer demand over compliance-driven demand.

This means:

1. Build the E85 market based on price and positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based on corporate demand for B5 blends based on social, and price-hedging opportunities — while limiting the practical impact of any differential in street prices of diesel vs biomass-based diesel by having low-level blends (that is, a $1.00 per gallon cent cost differential translates into a nickel a gallon at B5 blend levels).

3. Building markets in diesel and jet fuel based on overall price parity. That is, building a case that fuel price should include ta) the cost of volatility and risk with fossil commodity fuels; b) the social costs, such as disappointing end-use customers who prefer renewable fuels, and c) differential in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building in cellulosic biofuels with appropriate market mandates.

The bottom line

Clearly the industry is apoplectic over the waive-down and the strategic shift at EPA.

For advanced biofuels, EPA could very well have simply waived down the pool to 2 billion gallons — and industry will have to step gingerly around arguments for higher volumes — presenting virtually iron-clad production forecasts in biomass-based diesel. Clearly, building capacity and advocating “don’t mess with the RFS” has not been persuasive.

For corn ethanol, there is going to be a strong push back based on hopes that persuading EPA to stick with a tough mandated number will prompt the conventional fuels industry to push through wider adoption of E15, which would be good not only for corn ethanol, but ultimately for advanced ethanol fuels when they are available in higher numbers.

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.

Solar Rooftop Lease Securitization A Ground-Breaking Success

SCTY residential solar.pngSean Kidney

Last week we blogged that  SolarCity (SCTY) and Credit Suisse were about to issue a new $54.4 million, climate bond – a rooftop solar lease securitization. It’s out: BBB+, 4.8%, 13 years. The long tenor is interesting – and great. And S&P’s BBB+ rating suggest those credit analysts may be beginning to understand solar.

This bond has been long-awaited by the green finance sector, who are hoping it’s the harbinger of things to come.

I did get the chance to look at the S&P opinion. Their rating reflected, as they put it, their views on over-collateralization (62% leverage; that’s how companies do credit enhancement), SolarCity's track record and the credit quality of the household borrowers.

They also noted that “because this asset class has a limited operating history, we expect the rating to be constrained to low investment-grade for the near future”. Presumably that means we can expect better ratings five years away.

The asset-backed securities will be paid for with the cash flow from the SolarCity‘s rooftop solar leases. This allows SolarCity to raise fresh cash to do the next wave of deals; we think of this as supporting velocity in working capital.

I’m mentioning this because folks from the policy and carbon world sometimes feel a bit queasy about climate bonds backed by existing assets. “Shouldn’t we be focusing on new project finance”, they ask. No.

In the project space, as Citi’s Mike Eckhart is fond of reminding us, bonds only make up 5% of debt financing globally. Banks provide the rest – and that’s unlikely to change much.

The critical task for climate bonds is to re-finance – to provide an exit strategy for those folks who best understand project development risk: equity investors, energy corporates, and bank lenders. Once that project development risk has gone, climate bonds become the means to re-finance among the pension and insurance fund sector, whose risk appetite is much lower.

This is important for energy companies, allowing them to effectively offload “mature” assets (solar panels in place, leases signed, revenue flowing) and so quickly recycling capital into new projects.

It’s also vital for banks, struggling with recapitalisation pressures post-crash. If they can securitize their loan portfolios it will allow them to do more with their now reduced allocations to project lending.

It opens up a critical new financing option for companies, helping them grow faster. And boy do we need them to grow: if we’re to have a chance of avoiding climate change tipping points we need every low-carbon industry to grow at maximum rates.

SolarCity installs rooftop solar panels, typically at little or no cost to customers. The company owns the systems and its residential and commercial clients sign long-term agreements to buy the power.

Interestingly SolarCity‘s share price jumped 4.3% when the bond came out, making the largest US solar company by market cap. Confidence building? [Ed. Note: It should not be surprising that when a company gets access to a cheap new form of finance, it helps the stock.]

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

November 17, 2013

Everything Going for KiOR - Just Not Very Fast

Jim LaneKiOR Logo

What’s up with the cellulosic biofuels leader? Good news, bad news?

If you have ever spent any time reading up on ion thrusters — a next-gen engine technology that NASA recently employed on the Dawn spacecraft — you might chuckle when you think of the plight of poor KiOR (KIOR).

The good news about ion thrusters is that they can ultimately achieve speeds of 200,000 miles per hour, ten times that of the Space Shuttle. The bad news is that the Dawn took four days to accelerate from zero to 60 miles per hour.

Yep, zero to 60 in four days. Not exactly the Tesla (TSLA) of outer space. And that’s the story, as it happens, with KiOR.

It’s got everything going for it except pace.

Consider the background. You have one of the first next generation advanced biofuels plants at commercial scale. The woody biomass feedstock promises a way around the food vs fuel conundrum and promises new economic opportunity to the timber-rich US Southeast. The fuels costs are expected to be competitive with fuels made from fossil crude oil. Plus, the drop-in, renewable fuels offer a complete solution to the problem of blend walls and automotive infrastructure.

Not to mention, a celebrated cleantech investor in Vinod Khosla — recently augmented by Bill Gates — and the equity package for a second commercial plant all sewn up.

But the whole enterprise — well, it’s been a slow and steady tortoise, hasn’t it? How soon will it perform at capacity? For answers to your questions, let’s look at the progress in Q3.

The Tale of the Tape

In the third quarter, KiOR used 10,373 tons of wood chip feedstock, well short of the 45,000 tons the plant would consume at full capacity. Overall plant utilization was 23 percent. Reflective of 41% uptime and running at 50-60% capacity.

Production of 323,841 gallons of fuel was reported, a substantial gain over last quarter, when production was 75,000 gallons.

Overall yield was 31 gallons of cellulosic fuel per ton of feedstock, if we simply divide the fuel production into feedstock use — what we don’t know is how much bio-oil is being produced that was not upgraded to fuel. The process is supposed to yield, in this generation of the technology, north of 70 gallons of bio-oil per ton of feedstock. Suggesting that either yields are way short of optimal, or there’s a lake of 400,000 gallons of bio-oil awaiting upgrade — or, possibly, not suitable for upgrade.

The company is reporting 167,087 gallons of cellulosic fuel production in October — a gain of 50 percent over the average for Q3, and more than double the output for Q2.

Caveat catalystor: Those input costs

The company reported that “we saw a $2.3 million net increase in cost of goods sold relating primarily to feedstock and catalyst costs, along, to a lesser extent, with utilities, maintenance and other costs related to the ramp-up.”

In the general context of a $43 million quarterly loss and a development-stage company, we didn’t see much attention to this number in the analyst community. But, taken against a production jump of 248,000 gallons of fuels — well, it is easy to divide one number into the other and get a “feedstock and catalyst” cost jump of $9.27 per gallon. Again, we think there might be a lake of bio-oil out there. But it is a metric to watch.

Analyst reaction

Overall, analysts were bullish and share prices are up. Why? Analysts are applauding the increase in revenues and fuel production, noting the emphasis on increasing throughout from 50-60% towards 100%, and willing to wait for yield optimization to occur in 2014.

In other words, “we’ll bear the unsuitable oils or excess char for now — show us that you can shove in the woodchips.”

Pavel Molchanov at Raymond James writes:

“The first shipment from the Columbus plant in 1Q was a major milestone for KiOR and the cellulosic biofuel industry as a whole. The plant’s ramp-up since then, albeit slow, provides additional validation.

“Revenue up 3x in 3Q13: The key metric, of course, remains revenue which jumped 3x sequentially (after also tripling in 2Q) to $720,000. Production at Columbus reached 324,000 gallons, a similarly healthy ramp from 2Q, with October the best production month yet at 167,000 gallons. We continue to project that full nameplate utilization will be reached in the second half of 2014.

“Debt financing on deck: The equity round is therefore completed, putting to rest the market’s fears of more near-term dilution. The final step before construction can begin on the next production plant (Columbus II) is a high-yield debt raise, which we think will be in the range of $100-200 million. We see better than 50/50 odds of wrapping up the debt raise by year-end.

Piper Jaffray’s Mike Ritzenthaler adds:

“We maintain our Overweight rating and $5 target on shares of KIOR following the company’s 3Q13 print that included EPS of ($0.40) on $720k in revenue, both of which were in-line with management’s previous comments.

“Operations is currently focused on increasing feed rates (approximately 50-60% of nameplate in October) and is not yet optimizing yield (which partially explains why total production in October was ~15-16% of nameplate). We look forward to optimization through 2014 when the earnings power of the facility will become far more apparent.

“Columbus ramping as expected and on-stream improvements highlight the quarter. In 3Q13, KiOR shipped ~245k gallons of blendstock, at ASPs discounted to wholesale as (temporarily) expected. Management expects the discount to continue through 2013 as the facility ramps. On the call, management reiterated their target of >1 million gallons in 2013. Considering the uptime of the Columbus plant recently, we believe this production target is very achievable.”

The bottom line

Glacier, tortoise, ion thruster. Take your pick from the basket of analogies. But think in terms of tripled revenues, tripled production. Yield will have to come — and we doubt if anyone thought it would take this long, in the KiOR boardroom.

As long as investors stay with the company as it makes its Slow March to Energy Freedom — we expect great things out of KiOR in 2014 when yields come under the microscope.

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.

KiOR: Too Early to Jump In

by Debra Fiakas CFA
Kior's Columbus Facility

Last week cellulosic ethanol producer Kior, Inc. (KIOR:  Nasdaq)reported its strongest quarter production and financial results since the company first started commercial operations at its Columbus, Mississippi facility.  Kior turned out 323,841 gallons of ethanol fuel in the three months ending September 2013, bringing total production for the year to 508,975 gallons.  Along with the third quarter report, management did a bit of boasting over record production of 167,087 gallons in the month of October.  That represents a 2.0 million gallon per year run rate, but management is guiding for a more modest 1.0 million gallons.

All that good news was not enough to cover up a record net loss for the quarter of $43.1 million.  Cash production costs are still higher than revenue.  Granted some costs in the most recently reported quarter might be one-time in nature as the company settles into what they call ‘steady state’ production.  Still management has a big job ahead to ramp production level that will generate even breakeven results.

Kior has made a point of the scalability of its production technology  -  fluid catalytic cracking.  Granted it is a proven process perfected in the oil refining industry.  Management has also made a point of its wood chip feedstock  -  Southern Yellow Pine.  We have to concede the Southern Yellow Pine is available in abundance and it is priced accordingly.  Management is so confident in its production technology the company is planning a second production facility near Columbus.

Even with the $100 million Kior is getting from long-time fan Vinod Khosla and a few close friends, there is much for KIOR shareholders to worry about before production scales to breakeven in both its plants.  The company has been using about $25 million in cash per quarter to support operations in just one facility.

Since Kior went public in June 20111, the share price has been on a long-term grind downward.  There have been many more opportunities to collect shares at low levels than there have been chances to sell at peak prices.  The stock has recovered from a dramatic sell off and record low in September, but it still may be too early to jump into KIOR. 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

November 16, 2013

Graftech Manages the Heat of Competition

by Debra Fiakas CFA
Products like Graftech's ultra-thin heat spreader help customers manage the heat. Investors think restructuring will help Graftech do the same.

Feeling the heat of competition, graphite materials supplier Graftech International Ltd. (GTI:  Nasdaq) has initiated a restructuring of sorts.  The company’s two highest cost graphite electrode plants will be closed.  Those are located in Brazil and South Africa.  A machine shop in Russia will also be shuttered.  Locks will go on the doors in these locations by the end of June 2014.

Downsizing capacity is expected to yield substantial savings.  Total production capacity will be reduced to about 60,000 metric tons, which eliminates fixed plant costs.  More importantly the closures are expected reduce inventory requirements.  The company has stated that working capital improvements should reach $100 million over the next year and a half.

What is more, about 600 employees or about 20% of the company’s workforce will be getting pink slips.  The company estimates annual savings of $35 million.  That represents about 3.6% of annual direct costs, which should drop right to the gross profit margin.

The savings will come in handy as the company turns from older, declining markets to new, more lucrative sources of demand.  Graftech staged a major media event in August this year to publicize the opening of a new manufacturing facility in Ohio.  That new plant, which was purchased last year for $3.0 million, is dedicated to the production of a thermal management product intended for smartphones and tablets.

Of course, the restructuring effort comes with its own price tag.  Graftech management says they need to use about $30 million in cash over the next three quarters.  There is another $75 million in non-cash expenses related to the write-down of certain assets.  Shareholders have already seen about $18 million of these write-off expenses pass through Graftech’s income statement in the third quarter.  The rest will follow in the next two quarters.

So far investors have reacted with great enthusiasm to Graftech’s strategy.  The stock climbed 29.5% in the first week following the restructuring announcement.  No one would blame shareholders from taking some profits at the current price level near $11.36.  Price oscillators such as the Residual Strength Index suggest the stock has for the time being entered over bought territory.  Just the same we do not believe the last chapter has been written in the Graftech story.  If the stock retraces to the pre-announcement level, investors would have compelling chance to build positions in what is arguably a stronger, more competitive operation.
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

November 15, 2013

Is The Largest Solar Manufacturer a Bargain?

by Debra Fiakas CFA
Yingli logoIn the previous post on Canadian Solar (CSIQ:  Nasdaq) I suggested a multiple of 10 times the consensus estimate for earnings in 2014 might be a compelling value for the solar module producer.  Putting a value on is competitor Yingli Green Energy Holding (YGE:  NYSE) is not so easy given the string of losses reported by Yingli.  The usual price to earnings multiple cannot be used to value a company swimming in red ink.  That leaves the multiple of price to sales.  Yingli trades at 0.5 times sales compared to the one-to-one multiple that is the average for the solar industry. Call that difference the ‘red ink’ discount.

Yingli should have profits.  It lays claim to being the world’s largest producer of photovoltaic cells and modules.  The company shipped 2,300 megawatts of solar modules in the year 2012.  First Solar (FSLR:  Nasdaq) was a distance second.   The installed base of Yingli solar panels exceeds seven gigawatts and has spread over forty countries around the world.  Sales in the most recently reported twelve months were $1.8 billion, down from $2.3 billion in the year 2011, when prices were higher.

As depressing as are continued reported losses, the really bad news for Yingli is its spotty record in generating cash flow from operations.  There is an unsteady flow of inventory levels and collections on accounts receivable appear to run in fits and starts.  The results are a dwindling supply of cash resources, mushrooming current liabilities and rising long-term debt.

All this gloom and doom took its toll on the YGE price, with the stock setting a long-term low of $1.25 a year ago.  Since then the stock has been a dramatic ascent, rising by five times over in the last year.  As the solar industry re-establishes itself at a lower, more cost-efficient production capacity, more than just a few competitors are likely to wash out.  Indeed, there have been a number of acquisitions and bankruptcies in the sector over the past three years.  Suntech Power Holdings (STP:  NYSE) is the most recent casualty to a Chapter 7 bankruptcy filing by bond holders and the assets of Twin Creeks Technologies have now been tucked into GT Advanced Technologies (GTAT:  Nasdaq).

Nonetheless, Yingli is expected to be among the survivors.  That makes the stock worth looking at even though it is no longer trading at a bargain basement price.  Indeed, a review of historic trading patterns in YGE suggests the pullback in recent weeks might have left the stock in oversold territory  -  at least in the near-term.  It is a compelling opportunity for investors with long-term investment horizons and a bullish interest in the solar 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.

November 14, 2013

Tesla Tussles With Chinese Squatter

Doug Young 

Tesla LogoUS electric car maker Tesla Motors (Nasdaq: TSLA) has landed in the headlines with an escalating trademark dispute in China, casting a spotlight on Beijing’s ongoing efforts to bolster the country’s intellectual property (IP) protections. China has made great strides in its IP protection in the last 5 years, resulting in a healthier business environment where both domestic and foreign companies can feel more secure that their trademarks, copyrights and product designs won’t be illegally stolen and copied.

But this latest case involving Tesla shows there is still more work to do, especially in trickier areas like Chinese-language equivalents of famous western brand names. Tesla is the latest major trademark case in China to make headlines over the last 2 years, reflecting the recent build-up by many famous brands in the fast growing market. Media first reported on the case in August, saying a Chinese businessman had registered the company’s name locally in both English and Chinese in 2006. (previous post) The man also registered the Chinese Internet domain of tesla.com.cn, which carries a logo almost identical to the US Tesla’s and claims to be selling its own electric car.

According to the latest reports, the businessman now wants $30 million for the trademarks. (Chinese article) Tesla executives said last week that the trademark dispute is one of the last remaining obstacles to the company’s entry to China, following its recent approval by the government to sell its popular electric cars in the market.

Tesla’s trademark roadblock follows a similar high-profile dispute in China last year involving global tech giant Apple and its iPad tablet computers. (previous post) In that instance, a Guangdong-based computer parts maker had registered the iPad trademark years ago for a line of products that it later discontinued before Apple’s 2010 launch of its popular tablet computers with the same name.

Apple believed it had purchased the trademark through a deal with an affiliate of the Guangdong company, but realized later the trademark transfer was never consummated. Apple later sued to legally get possession of the trademark, and the Chinese courts ultimately helped to mediate a settlement that reportedly saw Apple pay $60 million for local rights to the iPad name.

In another high profile case last year, luxury goods maker Hermes lost in its latest bid to claim the rights to its name in Chinese, which had been registered by a clothing maker from Guangdong. In that case Hermes had registered its native French name in China as early as 1977, but failed to register the Chinese equivalent at a time when the domestic market for luxury goods was tiny.

Since then, demand for luxury goods in China has exploded with the nation’s rising economic clout, and the market is now one of the world’s largest. Hermes took the Guangdong company to court several times to try to regain the Chinese name. But in the latest case that reached a conclusion last year, a Beijing court ruled against the French company because it could not prove that it was a famous brand in China before 1995, the year that the Guangdong company registered the name.

Each of these 3 cases involves slightly different issues, but all are common in showing how so-called “squatters” can use Chinese trademark laws to force big western names to pay large sums for the rights to their trademarks in China. Such problems also exist in the west, but less complex language issues and a more experienced court system has made the squatter problem far less significant there.

China has taken big steps in its effort to stamp out the squatter problem, bringing the country more in line with global practices. Companies that can prove they were already famous brands in China when a local squatter registered their name can use that defense in the courts to win back their trademarks. But legal experts say Tesla may have difficulty convincing a judge the company was already famous in China when the Chinese businessman registered the company’s name in 2006. Hermes has had problems for similar reasons.

China should be commended in its recent efforts to boost trademark protection and more broadly for its moves to protect intellectual property, which have created a more level playing field for all businesses. But as the latest Tesla case shows, there are still a number of loopholes that need to be closed to improve this important area that is critical for orderly development of a private sector that plays an increasingly important role in China’s economy.

Bottom line: China needs to further improve its trademark registration system to stamp out the problem of squatters who register western brands.

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.

November 13, 2013

New Reports See Solar Outlook Brightening

James Montgomery
Sun and saguaro.jpg
Sun emerging behind saguaro by Tom Konrad

Scanning the new crop of reports from IHS, NPD Solarbuzz, and Navigant, here are a few key themes that emerge:

Demand Is Shifting to Asia. Global solar PV demand reached 9 GW in 3Q13, up 6 percent from the prior quarter and nearly 20 percent from a year ago, according to Solarbuzz. China's share of that 3Q demand exceeded 25 percent, compared to 10 percent just two years ago. Meanwhile, the National Energy Administration reportedly has increased its 2014 targets for solar PV capacity to 12 GW instead of 10 GW, while the State Council has said solar capacity should stay at the 10-GW/year pace through 2015, reaching 35 GW cumulatively installed by the end of 2015.

"There is a big shift in the solar PV market from Europe to Asia Pacific," said Dexter Gauntlett, senior research analyst and author of Navigant's report, which pegs solar PV capacity more than doubling from 2013-2029, from just under 36 GW to more than 73 GW. He especially points to new markets for distributed PV as prices fall; China, for example, will see more than 100 GW of solar PV deployed by the end of this decade. "We have increased our estimates for Japan, given the lucrative feed-in tariff scheme, but it is unclear for how long that scheme will be sustainable," he added.

Europe is Stabilizing. Europe dominated PV demand from 2006-2011 with nearly 80 percent of demand, but growth has fallen off consistently over the past two years, and rather precipitously in several countries. Continuing that trend, solar PV demand in Europe declined 11 percent between July-September from the previous three months, and for the year Solarbuzz sees an annual 37 percent dropoff, a four-year low and half the region's peak in demand in 2011.

Nevertheless, Europe remains overall a vast pool of end demand for solar deployment, nearly a third of global demand at 10-11 GW in 2014, with some markets offering especially attractive near-term growth. Germany, the U.K., Italy, and France will account for the vast majority of that, but there's potential in smaller markets such as Romania and Austria. NPD Solarbuzz sees overall European demand at around 2.5 GW per quarter for the next several quarters and growing slightly in the latter half of 2014. "The boom/bust phase at the major country level [e.g., Germany and Italy] is largely in the past," explained Solarbuzz vice president Finlay Colville. "We see much of Europe as stable in 2014," offered Sam Wilkinson, research manager at IHS, similarly pegging around 5 percent growth in MW installations.

Yes, there's a difference between "no more plummeting" and a "growth recovery" -- but stabilization of demand is good news. More predictable demand forecasting means lower risk and easier planning for investors and developers, Colville said: "It is very much a market that can be addressed, with more confidence now." Added Wilkinson: "Europe will remain a key region for business [and] so it will not be ignored."

Quarterly European solar PV demand. Credit: NPD Solarbuzz

Manufacturing Is Ramping Up. Stabilizing demand means an improved outlook for solar PV manufacturers, who have suffered a punishing couple of years and eagerly watch as the gulf between oversupplies and demand finally is narrowing -- something IHS sees officially happening in the next few months. "Things are looking brighter throughout the solar industry as PV demand climbs and spreads to new regions," states Jon Campos, lead PV capital spending analyst at IHS.

As a result those manufacturers are opening their wallets again: global capital spending is predicted to surge 42 percent to $3.3 billion in 2014, and another 32 percent to $4.3 billion in 2015. "The vast majority" of that growth spike will be internal production as part of a long-term strategy, as opposed to contracting out to Tier 2-3 suppliers which he says has been more of a short-term stopgap.

Global forecast of solar industry capital spending in U.S. $M. Credit: IHS

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.

November 12, 2013

Retail Renewable Energy Bonds Proliferating

by Sean Kidney
Wind solar finance.jpg
Renewable Energy Finance via BigStockPhoto

There has been a bit of interest recently about rapidly expanding options for retail investors to get involved in renewable energy projects. While we still see retail bonds as making a relatively modest contribution to the transition to a low carbon economy, they are important in engaging the public and creating awareness for green thematic investments which can only be good.

Here’s a round up of some of the activity going on in the retail bond market (please note, this is not an endorsement of and product’s credit characteristics, only their environmental ones)…

Good Energy bond 3x oversubscribed

Last month we blogged about UK-based Good Energy’s aim to raise £5m through a retail bond offering to finance investment in solar and wind energy generation. Within 3 weeks, Good Energy easily met their target, closing the book at £15m three weeks ahead of schedule!

The demand demonstrated for this bond and the earlier Ecotricity bonds is very encouraging. Question is, will this trend continue to the larger utilities? When the big utilities start issuing asset-linked climate bonds to finance their renewable energy assets, that’s when we’ll see real capital shifts.

Bonds to finance solar rooftop generation

A few days ago we blogged about SolarCity’s pending US rooftop solar lease securitization.

In the UK, CBD Energy (CBD.AX) is offering a “Secured Energy Bond” to raise finance to install solar panels for chosen UK businesses at no cost to the business but with income derived from Feed-In Tariffs. The bond is secured against the assets of the company and also has a corporate guarantee from the parent company. It will pay an annual coupon of 6.5%. The minimum investment into the bond is £2,000 for a 3 year fixed term and as the bond is non-transferable, it has to be held to maturity in late 2016.

A similar offering come from UK-based A Shade Greener which is aiming to raise £10m from small investors (min £1000) by offering 3 year retail bonds at 6% annual return, but with an interesting twist – all the interest paid upfront as a lump sum. Bizarre indeed (we’ve never seen it before) but according to the company, the decision demonstrates the confidence it has in the reliability of its income plus it wants to differentiate itself from similar offerings. The company, which has installed 25,000 solar panel systems, installs panels at no cost to the householder and collects the feed-in tariff payments. As with the CBD bond, this must be held for three years until maturity.

Canada’s largest solar co-op

Bullfrog Power and SolarShare have recently announced the completion of Toronto’s largest solar co-op project. The ‘Goodmark’ project is an 18,000 square-foot rooftop installation providing 100kW of power to a variety of companies within the building. With the successful completion of the installation, the project goes into a portfolio of PV assets against which Solar Bonds are issued and offered to SolarShare members. The bonds offer a return of 5% per year on a 5 year bond. The bonds are secured against a portfolio of solar PV assets (no construction risk), each of which has secured a 20 year Feed-in tariff power purchase agreement from with Ontario Power Authority.

Crow-source funding grows

There’s been a bit of hype recently about the potential for crowd funding as a tool for financing renewable energy. To be honest, we’ve mostly put this into the ‘great but not nearly big enough’ category. However, some recent articles have shown that, while it’s still not likely to finance all the $1trn per year needed globally to avoid catastrophic climate change, numbers are growing. In Europe in 2012, crowd funding (not just energy) grew 65% over 2011 to reach EUR735m. This is not insignificant compared to the European venture capital market which is EUR3bn. Some estimates put 2013 growth at 81% which would push it over $1bn.

It also has some major advantages over regular debt funding or bank lending – it can fund small businesses and organisations that don’t have access to the regular financing channels and it can be much faster and more nimble than traditional funding sources.

In Europe crowd funding has mainly been a tool for energy cooperatives. Europe has a strong tradition of cooperatives (apparently more Europeans are invested in cooperatives than in the stock market). The speed with which crowd funding and the energy cooperative sector are expanding (European energy cooperatives grew from 1,200 in 2012 to 2,000 this year) demonstrates that there is potential for community-financed initiatives to shake up the energy market.

A number of crowd funding platforms have sprung up to focus on renewable energy projects including Solar Schools, Abundance Generation, SunFunder and Solar Mosaic. Solar Mosaic in the US has so far invested $3.8 million in different projects ranging from 1.5kW – 500kW. Abundance Generation in the UK is smaller but using a similar model has just raised £400,000 for SunShare Community Nottingham Project. SunFunder is focussed on emerging markets and connects investors to vetted solar businesses working on the ground in Africa, Latin America, Asia and the Caribbean.

Yes, it’s still small but it’s growing.

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

SolarCity Rooftop Solar Lease Securitization Advances

by Sean Kidney
SolarCity logo

US firm SolarCity (SCTY) announced last week that it was seeking to make a private placement of a $54.4 million, 13 year bond backed by cash flows from rooftop solar leases. SolarCity is the second-largest U.S. solar company by market capitalization.

Lead manager Credit Suisse (CS) has been working on this deal for some time now, which will now only be eligible to be sold to big, qualified investors. It’s been a race this year between them and a US bank to get the first solar rooftop loan securitization our the door. Looks like the Swiss may win; we’re hoping they will start a trend (these are dinky-di climate bonds, after all).

The Financial Times is calling it the world’s first “sunshine-backed bond”. Very amusing, although not quite correct; SunPower’s (SPWR) 2010 Italian Andromeda bond has that tag.

According to the Financial Times story, Credit Suisse had a tough time convincing rating agencies to evaluate the bonds because of the lack of historical data; Standard & Poor’s have apparently given it a reasonable rating in the end – details still to be released.

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

November 11, 2013

What Do The New Crowdfunding Rules Mean For Renewables?

James Montgomery
Crowdfunding illustration via Bigstock
The SEC has finally proposed its rules to allow crowd-funding under the Jumpstart Our Business Startups (JOBS) Act. What do they mean for small-scale investments in renewable energy companies and projects?

Title III of the JOBS Act created an exemption under securities laws for crowdfunding, which set the table for its regulation by the SEC -- that was supposed to happen by the end of last year. Two weeks ago the SEC finally issued its proposed rules on crowdfunding (summary here, full 500+-page PDF here). Here are the highlights:

  • Companies are capped at raising $1 million cap per year through crowdfunding.
  • Investors with less than $100,000 annual income and net worth, could invest up to $2,000/year or 5 percent of annual income or net worth (whichever is greater).
  • Investors with at least $100,000 annual income and net worth, investment amount levels rise to 10 percent of annual income or net worth (whichever is greater), and purchase no more than $100,000 of securities through crowdfunding.
  • Non-U.S. companies are ineligible for the crowdfunding exemption, as are companies that already report to the SEC, some investment companies, those who aren't compliant with certain reporting rules, and others with no business plan or pending M&A deals.
  • Securities purchased via crowdfunding can't be resold for a year.
  • Under the proposed rules, issuers publishing notices advertising an offering can include terms: the nature and amount of securities offered, their pricing, and the closing date of the offering period.

So how do these proposed rules affect companies seeking to get funded by the masses? "Renewable energy companies seeking to enter the new territory of offering a security legally may find it easier to raise start up capital or additional capital because they can offer investors a return on investment" such as stock or debt with interest payable, explained Debbie A. Klis, attorney with Ballard Spahr. "It would not be difficult to create a compelling campaign to raise funds for renewable energy products especially if it brings revenue and jobs to areas of the U.S. (and abroad) that it need it the most."

For small businesses and entrepreneurs seeking to raise capital, the rules "may be a God Send" to help solve delays common in formal full-blown SEC registration and disclosure, observed Lee Peterson, senior tax manager with CohnReznick. Some entrepreneurs dream of building the next Apple or HP on the renewable energy side; others might see crowdfunding as a way to bridge the "valley of death" in startup-up financing to bring their company to market. "So as long as folks act smart and understand the investment risks," he added, "it may be a good thing."

Of course there's a difference between crowdfunding as a donation, and microfinance as a path toward ROI. SEC's proposed rules address the latter, as a way to opening doors to much more private capital. Selling securities to the public generally requires SEC compliance, and has been allowed until now only if it involves donations with no return on investment (ROI). Sites like Kickstarter and Indiegogo might choose not to help companies issue securities and just continue to facilitate donations, with investors assuming that the company raising money is playing by the rules. Indiegogo, EquityNet, and RocketHub reportedly are interested in pursuing equity crowdfunding, while Kickstarter is not.

One of the early renewables crowdfunding success stories has been Mosaic, which has amassed investments for projects totaling $5.6 million in value and "tens of millions of more dollars in the pipeline," according to a company spokesperson. It has pitched 25 offerings in over 19 projects, with 2,500 investors spanning nearly every U.S. state, and roughly half its projects sell out within a week. Its newest offering is a 12.3-MW installation across more than 500 homes at Joint Base McGuire-Dix-Lakehurst in New Jersey. The company has been working with the SEC as the agency wrestles with understanding how crowdfunding meshes with traditional finance, though it claims it doesn't and won't rely on the JOBS Act for its business. "There are different provisions of the securities laws that we have relied on in the past, and I would expect that this would continue to be the case in the future," noted Nick Olmsted, Mosaic's general counsel and corporate secretary.

The Natural Resources Defense Council (NRDC) recently announced its own crowdfunding plan, to build an online platform to help organize and direct groups how to put solar on schools: site assessment, approvals, funding, the RFP process, etc. "Like most NGOs, we go out to big donors and foundations," explained Jay Orfield, environmental innovation fellow in NRDC’s Center for Market Innovation. This effort, though, means going to "people who are going to use and benefit" from such solar installations, getting them to fund this $5, $10, $50 at a time, he said. "That market validation is specifically what we find really exciting about crowdfunding."

Needs Some Tweaking

Not that the SEC's proposed crowdfunding rules are without criticism. Capping fundraising at $1 million over a 12-month period might be too low of a threshold for many companies. "I think the gist will be that crowdfunding has some very low limits on how much you can raise," said John Marciano, partner at Chadbourne & Parke LLP. "[It] raises the question of whether it is really a viable financing option for building and owning projects, except maybe very small projects." Some companies could be motivated "to create many subsidiaries so each entity can raise money independent of the other," though "we have not heard about rules on aggregation yet," added Debbie A. Klis, attorney with Ballard Spahr.

Another potential sticking point in the rules: Anyone investing more than $500,000 has to provide audited financial statements. Small investors might balk at that, since in some cases that could be part of why they went the crowdfunding route in the first place vs. a more formal investment plan.

These proposed rules now move into a 90-day comment period, which will almost certainly be voluminous, and likely will be extended by the SEC, with final rules coming after that -- likely late 2014 or even 2015, points Adam Wade, associate at Foley Hoag. With that much time, there could be significant difference between these preliminary rules and what gets finalized.

Marciano likens the crowdfunding discussions as similar to those around real estate investment trusts (REIT) and master limited partnerships (MLP), two other potential avenues for funding renewable energy ventures, particularly at smaller scales. "It has the promise of raising cash equity, but not tax-equity. Time will tell whether it is a viable option, but I'm guessing it may be difficult to implement."

The topic will be presented in depth next week at Renewable Energy World Conference in session 17B - New Sources of Low-Cost Capital for Solar Projects.

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.

November 10, 2013

Maxwell Technologies in the Balance

Tom Konrad CFA

Maxwell Logo

Will Chinese hybrid bus subsidies be renewed?  The answer will be crucial for Maxwell Technologies (NASD:MXWL) in the coming months.

I, and most analysts following ultra-capacitor manufacturer Maxwell Technologies, (NASD:MXWL) were considerably surprised at the strength of its third quarter earnings.  China had failed to renew subsidies for hybrid buses in the third quarter, and Chinese hybrid bus manufacturers have long been a significant part of Maxwell’s business.

Hybrid bus sales, even without subsidy, ended up better than I expected, accounting for 30% of Maxwell’s ultra-capacitor sales in the quarter.  Also helping results were strong ultra-capacitor sales to the wind industry (25%) and a large contribution from their distribution channel (22%.)

Going forward, sales from the distribution channel will be falling, as this is previously deferred revenue from Maxwell’s recent earnings restatement.  $3.9 million of deferred revenue remains in this channel, most of which is likely to be recognized in the fourth quarter, but significantly down from this quarter, when it amounted to $11.3 million.

China Hybrid Bus Subsidies

The big question mark for the fourth quarter is when and if Chinese hybrid bus subsidies are renewed.

This renewal has been expected for some time, but the Chinese government clearly marches to its own tune.  China did release its “New Energy Vehicle” subsidies in September, but these did not include subsidies for hybrid buses.  According to a 2009 World Bank report on electric vehicles [.pdf], New Energy Vehicles were previously defined as “vehicles that are partially or fully powered by electricity.”  But the new program includes only fully electric vehicles (EV)plug-in hybrid electric vehicles (PHEV), and Fuel Cell vehicles (FCV).

MXWL Q3 and projections.png
My estimates of Maxwell's revenues and earnings per share with and without renewal of Chinese hybrid bus subsidies.

Maxwell’s bus manufacturing customers expect that hybrid subsidies will be released separately.  The catch is, these subsidies have been expected for months, and the delay is leading many investors to question if they will be released at all.  As you can see in my projections above, the impact of subsidy renewal on Maxwell earnings and revenues is likely to be significant.  If the subsidies are not renewed soon, Maxwell’s management is predicting that total revenues could fall 30% ($16 million) in the fourth quarter, although approximately $7-8 million of that decline is likely to come from falling ultra-capacitor sales through the distribution channel.

While I don’t have any special insight into the Chinese government’s plans, the impetus for the new energy vehicle and hybrid subsidies is two-fold.  The goal is partly to combat China’s horrible urban pollution problem, and partly to foster Chinese leadership in what they consider an strategic industry.  When it comes to assessing the likelihood of renewal for the hybrid subsidy, cleaning up air pollution is likely to be helped more by hybrid subsidies than the existing PHEV subsidies alone.  On the other hand, when it comes to nurturing new industries, the current subsidies for PHEVs, EVs, and FCVs are likely to be more effective than a renewed subsidy for hybrids.

Hybrid subsidies are more effective at reducing pollution because hybrid vehicles are typically much more cost effective.  While each PHEV could reduce local pollution  twice as much as a hybrid would, some of that pollution reduction would simply be moved from the city where the bus is operating to the coal plant which generates its power.  Further, the incremental cost of a hybrid is a fraction of the incremental cost of a PHEV, so many hybrids could replace conventional buses for the same cost as a few PHEVs.

On the other hand, hybrid technology is fairly mature, and a foreign company (Maxwell) is the leading supplier of the crucial untra-capacitors for hybrid buses.  In contrast, PHEV buses will use a large number of batteries, and China has many leading battery manufacturers, meaning that China is more likely to favor subsidies (such as those for PHEVs) which help the battery industry than the ultra-capacitor industry.  Further, PHEV and EV technology is still developing, so China is likely to have an easier time becoming a leader.

With these countervailing forces, I find it impossible to predict when or if China’s hybrid subsidies will be renewed.  Given this uncertainty, I have closed out my short position in the stock.

Analyst Reaction

Several of Maxwell’s analysts are much more confident than I am that subsidies will be renewed.  Since the earnings announcement, Ardour Capital and UBS have both upgraded the stock from “Hold” to “Accumulate.”  I can’t imagine they would have made these upgrades if they did not expect hybrid subsidies to be announced soon.

It also may be that, if the analysts are more familiar with ultra-capacitor technology than hybrid vehicle and PHEV technology, they could expect that Chinese PHEV buses could go a long way to replacing lost revenue from Chinese hybrid buses.

Maxwel Technologies' Product Portfolio
The Difference Between Hybrids and PHEVs

In the quarterly conference call, Maxwell’s COO and interim CEO, John Warwick painted the PHEV bus opportunity with an optimistic brush.   To create the first generation of PHEV bus, Maxwell’s customers are “basically taking the diesel hybrid using ultra-capacitors and adding a battery power to it for propulsion for the first 30 plus kilometers.”  Hence, each first generation PHEV bus will use the same number of ultra-capacitors as a hybrid bus.

He did not discuss what the second generation might look like, most likely because they are likely to require fewer ultra-capacitors.  The reason hybrid buses use ultra-capacitors rather than batteries is because batteries have low power, but high energy capacity: While batteries can hold a lot of charge, they are not very good at delivering and accepting a large amount of charge in a short period.   The large mass of a bus means that much of the energy recovered while braking would be wasted if it had to be absorbed by a reasonably sized battery pack for a hybrid.

In contrast, ultra-capacitors have high power but low energy capacity.  They absorb and discharge electricity quickly, but can store very little of it.  This makes ultra-capacitors suitable for a hybrid bus, but not for a PHEV bus.  A PHEV needs to store a significant portion of its fuel as electricity so requires a large battery pack.

Although batteries have low power capacity on a unit basis, the large bank of batteries required by a hybrid bus will still be able to deliver and absorb a significant amount of power in a short time.  This means, as manufacturers seek to cut the cost without sacrificing the performance of future PHEV buses, it will be relatively easy to significantly reduce the number of ultra-capacitors per bus.  Depending on the type of batteries used, it’s quite possible that a PHEV bus will require no ultra-capacitors at all.  American start-up ePower has developed a hybrid drive-train suitable for class 8 diesel trucks using only lead-carbon batteries from Axion Power (OTC:AXPW.)  BAE Systems (LSE:BA) sells a hybrid bus drivetrain using only lithium-ion batteries.  Allison Transmissions (NYSE:ALSN) has been selling hybrid bus drivetrains since 2003 using nickel-metal hydride batteries.  If ePower, BAE, and Allison do not need ultra-capacitors to make a bus-sized hybrid work, surely Chinese companies can do the same with a PHEV bus.

One other reason PHEV buses are unlikely to replace hybrid buses for Maxwell is simply the size of the market.  Given the higher cost of PHEV buses arising from the large battery pack, fewer PHEVs are likely to be sold, even under the new subsidy regime.


If Chinese hybrid bus subsidies are renewed in the near future, I expect Maxwell’s stock to rise rapidly because of its much improved near term prospects.  While I’m far from certain that this will happen soon, if ever, I feel the chance is significant.  Therefore, I decided to close my short position in the stock.

Going forward, the very real possibility of no hybrid subsidy renewal makes me unwilling to recommend the stock, either. If I were to have any position, it would be to bet on a big move in one direction or the other with long calls or puts.

This article was first published on the author's Forbes.com blog, Green Stocks on October 31st.

DISCLOSURE: No Position.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 09, 2013

Third Quarter Earnings: Biofuels: Gevo, Solazyme, and Amyris

Jim Lanefour_horsemen-all

SZYM, AMRS, GEVO check in with Q3 results. What’s heavenly, what’s hellish?

In years gone by, it was not too hard to write up a summary of Gevo (GEVO), Solazyme (SZYM) and Amyris (AMRS)— all aimed at fuels, all in the development stage, all used synthetic biology in closed fermenters, all had big backers ranging from brand-name equity partners to big-time strategics, all went public in the same 2010-11 IPO window.

These days, much more complex. It’s a jungle of production costs, average selling prices, offtake deals, LOIs, and MOUs. Following them requires just a certain mastering of the markets in farnesene, dielectric acid, paraxylene, oleic oil, erucic acid, squalane, fragrance oils, skin cream. Oh, and fuels like renewable diesel, biodiesel, isobutanol and jet fuel, too.

But we need not look only at the complications, friend. All you have to do is locate and measure the four horsemen of the financials — the items that are critical for industrial biotechnology at scale..

As Grantland Rice was moved to observe, you might know the Four Horsemen by aliases. In industrial biotech, you might have heard them described as Revenues, Strength, Capacity and Mix. But they are the Pale Horse, the Black Horse, the Red Horse and the White Horse.

They deliver the company from the high-value, small-market products at the top end of the price curve to the lower-value, high-volume products (where fuels reside, for example). So, the Q3 results are in and what have we learned?

four_horsemen-paleThe Pale Horse: Revenues

Like the pale horse, revenues should be strong and transparent.


Total revenue for the third quarter ended September 30, 2013 was $10.6 million compared with $8.6 million in the third quarter of 2012, an increase of 24%. Revenues in the third quarter of 2013 included $4.8 million of product sales compared to $3.8 million in the same period of 2012, an increase of 27%. Going forward, Piper Jaffray’s Mike Ritzenthaler cautions: “First, that the 2014 milestones are far less granular and under control than those in 2013, and that the company will not disclose many supply agreements – obfuscating investors’ ability to gauge firm underlying demand for tailored oils.”

Digest note: Strong growth that just missed Wall Street expectations.


Aggregate revenues for the quarter ended September 30, 2013 were $7.0 million compared to aggregate revenues of $19.1 million in the third quarter of 2012. Last year’s third quarter revenues included $1.7 million of sales related to the Company’s ethanol and ethanol-blended gasoline business, a business which the Company transitioned out of in the third quarter of 2012. Of the $7.0 million in aggregate revenues in the quarter ended September 30, 2013, $4.1 million was related to renewable product sales and $2.9 million was related to collaboration and grant revenue.

Digest note: Biofene sales are gaining traction…it all depends on production capacity and cost.


Revenues for the third quarter of 2013 were $1.1 million compared to $0.6 million in the same period in 2012. They included proceeds from sales of biobased jet fuel to the U.S. Air Force (USAF) of $0.4 million, revenue under Gevo’s agreement with The Coca-Cola Company, and revenue from ongoing research agreements.

Digest note: Essentially development-stage here – the meaningful numbers await 2014 and full ops at Luverne.

four_horsemen-blackThe Black Horse: Margins, financial strength and partner relations

Like the black horse, these should be robustly positive and utterly fearsome.


Third quarter GAAP net loss attributable to Solazyme, Inc. common stockholders was $30.7 million, which compares with net loss of $22.5 million in the prior year period. Cowen & Company’s Rob Stone and James Medvedeff: add: “2013 guidance lowered, now targeting to be cash flow positive in 2015. SZYM lowered its FY:13 revenue guidance. As such, SZYM expects FY:2013 revenue of $40-$42M and expects to be cash flow positive in 2015. Piper Jaffray’s Mike Ritzenthaler strikes a cautious note in warning: “With Bunge (BG) exploring alternatives for its Brazilian sugar business, we question whether a new owner would find much novelty in the Solazyme project – we believe investors should account for this risk.”

Digest note: has the partners and the balance sheet to manage growth. But watch Bunge.


Rob Stone and James Medvedeff of Cowen & Company note: “AMRS targets $4.00 per liter cash cost by year-end, about breakeven on the lowest ASP products in the portfolio. Jet fuel is making progress, and work continues on drilling fluids, but time to volume use is not certain.” GAAP net loss for Q3 was $24.2 million compared to a loss of $20.3 million for Q3 2012. Cost of products sold increased to $8.3 million for the three months ended September 30, 2013 from $4.4 million for the same period in the prior year. “Achieved lowest quarterly cash operating expenses since our Initial Public Offering in 2010… Following quarter-end, closed initial tranche of convertible note financing for $42.6 million.”

Digest note: Has the partners and they believe; but will costs come down and capacity expand fast enough?


The net loss for Q3 was $15.9 million compared to $12.1 million for the Q3 2012. Baird’s Ben Kallo writes: “Capital raise will be needed in the near term. GEVO ended Q3:13 with ~$25.7M in cash, and we believe GEVO has enough liquidity to operate into Q1:14. We believe continued progress at Luverne and/or increased interest in the licensing of GEVO’s GIFT technology could help the company to receive funding from a strategic investor or return to capital markets..

Funding used in the development of the bio-para-xylene facility was received from Toray Industries, Inc. under a definitive agreement previously announced in 2012. Speaking of partners, in August Gevo announced the opening of its biorefinery for fully renewable paraxylene at South Hampton Resources in partnership with Coca-Cola and Toray Industries. Toray has provided capital for the construction of the Silsbee facility and has signed an offtake agreement for paraxylene produced at that facility.

Digest note: Expect a capital raise soon. The model for paraxylene is locked in and a winner, if the technology comes through.

four_horsemen-redThe Red Horse: Production capacity and timeline to scale

Like the Red Horse, these must be as urgent and swift as fire trucks racing towards a rescue.


If ever there was an argument for the supremacy of the Red Horse, it’s this: after announcing a 3-month slip at the Moema plant — and keeping in mind, leading energy analysts like Raymond James’ Pavel Molchanov had long-modeled such a slip — the stock was hammered 15 percent in today’s trading.

Solazyme CEO Jonathan Wolfson notes: “The facility in Iowa is already supplying market development samples to customers. Construction at the Brazil facility is in its final phases at over 90% complete and commissioning is underway…our timeline for oil production at Moema has been moved into 1Q14, in part to accommodate additional enhancements we are making at the facility. Stone and Medvedeff at Cowen & Co add “Two different tailored oils have been produced at 500K liter scale and a third is planned before year-end at the Clinton plant.”

Raymond James SVP Pavel Molchanov writes: “Solazyme is set to reach commercial-scale production in the U.S. and Brazil in 1Q14 – unquestionably the first player in the algae arena to claim such a feat, although it is a quarter later than management had previously targeted. It’s a minor pushout in the grand scheme of things…The trajectory of the ramp-up will certainly be back-end-loaded: while this is not much more than a guesstimate on our part at this point, we anticipate utilization of 8% in 1Q14, rising to 50% in 4Q14.

Digest note: It’s a delay at Moema, but if it is three months and if Clinton proceeds to accelerate, it will hardly matter in the long run. But this scale-up step — from a development-stage company to heavy production at scale – it’s the big one now. Risks abound – we’ll see in the next 12 months how Solazyme has prepared for the bumps in the road.


The company notes that it “operated with all six fermentors during the entire quarter at the Company’s farnesene production facility in Brotas, Sao Paulo, Brazil. The Motley Fool’s Maxx Chatsko adds: “Management expects total farnesene production for 2013 to come in at more than 4 million liters.

Rob Stone and James Medvedeff of Cowen & Company noted: “In addition to squalane, niche diesel, and farnesene for base oils, shipments may commence for other categories such as flavor and fragrance, and polymers and plastics. However, Brotas is likely to take 2-3 years to fully ramp to 40MM liter annual capacity.”

Digest note: It’s a long way to Tipperary — or, rather, the tipping point of full-scale operations at Brotas. That, perhaps more than anything, represents the discount on the valuation of Amyris compared to the underlying value of its disruptive technology. It’s a long walk to freedom, as Mandela noted.


The company notes that in August, it had “increased commercial production of isobutanol at its Luverne facility by bringing online a second production train,” and added that “Current production of isobutanol is intended to be sold into the specialty chemicals market with Sasol (SSL), specialty fuels market and converted into bio-jet fuel for the U.S. military.”

Last month, Gevo signed its first letter of intent to commercially license its GIFT technology to IGPC Ethanol. IGPC is a farmer owned co-op that owns a 150 million liter plant in Ontario, Canada and has been producing ethanol since 2008. IGPC is interested in licensing Gevo’s GIFT technology to incorporate isobutanol production at its ethanol facility.

Digest note: Customers are there, and more coming. It all comes down to the production cost — can Gevo deliver? If so, it’s a massively undervalued stock.

four_horsemen-whiteThe White Horse: Product and customer mix

Like the White Horse, these should be as dazzling as the new-drifted snow and a blend of all the colors of the rainbow.


Solazyme CEO Jonathan Wolfson notes: “Our commercial progress has accelerated with the recent announcement of two supply agreements…and advance the commercialization of our food ingredients out of our Peoria facility. This week we launched a completely new skin-care brand and product line, EverDeep, our second brand along with Algenist.”

Yep, there are supply agreements with Unilever in the (initial) 10,000 MT range, scheduled for 2014. And one with Goulston Technologies in the textile lubricants market. In addition, Solazyme and Bunge extended and expanded their JDA to enable the Solazyme Bunge Renewable Oils JV to have access to a broader portfolio of oils.

Digest note: Early days on delivering full offtake for Moema — but the momentum is there with big brands. Can Moema open on time, produce as expected, and will the customers line up at the right time. It’s all about Moementum, isn’t it?


Rob Stone and James Medvedeff of Cowen & Company note: “In addition to squalane, niche diesel, and farnesene for base oils, shipments may commence for other categories such as flavor and fragrance, and polymers and plastics.

However, The Motley Fool’s Maxx Chatsko adds: “Successfully commercializing the first fragrance molecule with partner Firmenich early next year will pave the way for higher-value products, while additional oils and fragrances being developed with International Flavors & Fragrances hold even more promise for the company’s future…The average selling price per liter of farnesene dropped considerably, but that was expected as sales of lubricants with Cosan increased in the product mix. Previously, most of the company’s sales were the emollient squalane — the highest-value product made from farnesene — to the cosmetic industry, as well as renewable diesel — one of the lower-value products offered — to various Brazilian transportation authorities.

Digest note: Very nice broadening of the customer mix — which should broaden still further as the costs come down and Amyris can start reeling in margins on bigger-market products. But how big, how soon?


In September, Gevo signed a supply agreement with the U.S. Navy to supply them with 20,000 gallons of Gevo’s renewable alcohol-to-jet-5 (ATJ-5) jet fuel and an option to increase the order to 90,000 gallons.

Gevo has previously supplied ATJ-8 jet fuel under its contracts with the U.S. Air Force for 56,000 gallons and the U.S. Army for 16,150 gallons. On July 24, 2013 Gevo announced that it had signed a supply agreement to supply the U.S. Coast Guard with up to 18,600 gallons of finished 16 percent renewable isobutanol-blended gasoline.

Digest note: For right now, it’s anchors aweigh as the company leans heavily on government contracts — look for the Sasol (SSL) relationship to take up the slack as Luverne expands.

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

November 08, 2013

Sunset for Suntech as China Solar Target Rises

Doug Young 

Sunset for Suntech. Photo by Tom Konrad

More good news is coming for the rebounding solar sector with word that Beijing is accelerating its build-up of solar power plants in a bid to help the industry and also improve China’s dismal air quality. But that news is coming too late for rapidly disappearing sector pioneer Suntech (NYSE: STP), which has just announced it has formally launched a liquidation process that will end its life as an independent company. Suntech’s downbeat news isn’t really unexpected, and comes amid a much broader flurry of positive signs for a solar panel sector that is finally emerging from a downturn that has lasted nearly 3 years.

The latest piece of upbeat news from the corporate sector came just a day ago, when Trina (NYSE: TSL), one of the largest players, raised its shipment guidance for the third quarter by 20 percent, and said margins would also be significantly better than previously forecast. (company announcement) Trina’s news came after Canadian Solar (Nasdaq: CSIQ) gave a similarly upbeat update on its third-quarter results, including a return to profitability for the period. (previous post)

The latest good news for the sector comes from Beijing, which has raised an already aggressive target for new solar power plant construction even higher to help the industry. According to the latest reports, Beijing has raised the target by 20 percent, with an aim for 12 gigawatts of solar power capacity nationwide by 2014, up from a previous target of 10 gigawatts. (English article)

Beijing was always an aggressive supporter of the solar panel sector, offering generous incentives that led to a huge build up in manufacturing capacity. That resulted in massive oversupply that sparked the recent downturn. But while it supported a build up of manufacturing capacity, Beijing didn’t support a parallel build-up of domestic solar power plants, with the result that manufacturers like Trina, Canadian Solar and Suntech relied completely on Europe and the US for most of their sales.

Now Beijing is trying to rectify that imbalance with an aggressive build-up of solar plants, with an aim of 35 megawatts of capacity by 2015. That target looks a bit unrealistic to me based on the 12 megawatt target for 2014. But then again, perhaps we’ll see a sudden massive construction binge in response to Beijing’s recent calls to clean up China’s highly polluted air, and also the government’s determination to support solar panel makers.

That rapid domestic build-up may be good news for relatively healthy companies like Trina, Canadian Solar and Yingli (NYSE: YGE), but it comes too late for bankrupt Suntech, which has just filed an application for provisional liquidation in the Caymen Islands where it is technically based. (company announcement) This application looks like sunset may be imminent for the company, whose main manufacturing assets are being purchased by Hong Kong-listed Shunfeng (HKEx: 1165) for 3 billion yuan. ($500 million) (previous post)

There’s not much new to say about this latest development, except that it’s coming a bit faster than I had expected. I had previously said that Suntech’s bankruptcy reorganization could be delayed by litigation in New York and Italy; but now it appears the Chinese court hearing the case wants to go ahead and liquidate Suntech sooner rather than later.

One interesting footnote as the end draws near is what’s happened to Suntech’s stock. This kind of bankruptcy filing usually causes a company’s stock to become nearly worthless, since shareholders seldom recovery anything from such reorganizations. But in this case Suntech’s stock held its value, and was trading as high as $1.58 just 2 days ago. Now that the end is finally near, shareholders finally seem to realize they may not get anything. Suntech’s shares plunged 16 percent in Wednesday trade, and were down another 11 percent at $1.12 after hours. Look for the downward plunge to continue, until the shares hit the nearly worthless level where they should have been throughout the bankruptcy process.

Bottom line: Newly raised power plant targets will help China’s rebounding solar panel sector, but Suntech shares are likely to soon become worthless as the company liquidates.

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.

November 07, 2013

Wall Street Banks Promote New Green Bonds Framework

by Sean Kidney

Earlier this month CitiBank (NYSE:C) and Bank of America Merrill Lynch (BoAML; NYSE:BAC) launched, via a special EuroWeek report on ‘sustainable’ capital markets, a “Framework for Green Bonds“. This is potentially a big development.

In the paper the two banks laid out a ‘vision’ for the green bonds market and called for a Green Bonds Working Group of issuers, dealers and investors to be formed to drive the evolution of the nascent market. The paper calls for debate about the green bond market, especially about how to guarantee that green bonds are more than just a coat of greenwash. Hear hear!

Citi and BoAML included an open invitation for banks, investors and fund managers to join a Steering Committee for a Green Bonds Working Group. JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) are the first banks to join. Also invited are ratings agencies, NGOs, regulators and the like.

The paper proposes a voluntary “framework” for the issuing of green bonds (a.k.a. climate bonds), where issuers and banks commit two key things:

1. Creating transparency on the actual use of funds, and reporting on that use.

2. That issuers should use and refer to an authoritative, third party list of criteria for assets that can be included in a green bond.

The main point the framework asserts is that green bonds are about the “green” qualities of the underlying asset, not whether a company is relatively green or not. Bonds have to be linked to actual wind farms or green buildings, or projects to build them. This means that a company does not have to score well in ESG or green rating systems to be able to issue green bonds – they just have be building green kit. That – which is also the Climate Bonds Standard approach – allows a much wider universe of companies that can issue green bonds.

(Note that some of the EuroWeek journalists writing elsewhere in the report haven’t quite got this yet; they’re still thinking the idea is for “complicated” company ratings. But in fact a physical asset approach should end up being very simple for issuers. The complexity is in developing the simple criteria.)

That, of course, does raise the question of what is meant by green kit.

The paper then references five possible taxonomies for issuers to use: OECD, World Bank (BRD), IFC, EIB and the Climate Bonds Taxonomy (yes, we were involved in some of the discussions around the Framework). It allows that further credible taxonomies may arise.

There’s not a lot of difference between these taxonomies; they are all coming from the same position and are all about climate investments. But there are differences in the level of practical detail provided and underlying regimes, such as reporting requirements.

At Climate Bonds we’ve focused on developing a Climate Bonds Taxonomy to both explain what we mean by “investments important to a rapid transition to a low-carbon and climate resilient world”, and to signal where we’ll be rolling out detailed eligibility criteria under the Climate Bonds Standard. You’ll find more explanation of how it all works on the Taxonomy page.

What the Green Bonds paper doesn’t do is call for certification or verification, although it allows that this may be a further market development.

Our view is that in the corporate market, specifically for “asset-linked” bonds modelled on the World Bank’s Green Bonds, third party verification will be important to trust. The Climate Bonds Standard is pitched as a gold-level but straightforward certification scheme, designed specifically to add credibility to corporate green bonds.

Here is the full text of the Green Bonds paper: if you have thoughts or comments please let me know, or use the comments function at the bottom of the web site page for the blog. The more discussion at this stage, the better.

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

November 06, 2013

Canadian Solar Bags Another Module Sale

by Debra Fiakas CFA
Canadian Solar Logo
Last week Canadian Solar (CSIQ:  Nasdaq) bagged another solar module supply agreement  -  this time on the home turf of some of its staunches competitors.  Of course, the company has its own manufacturing foothold in China.  Canadian Solar is to supply its solar modules to China Three Gorges New Energy Company to a 100 megawatt solar power project in Guazhou County in Gansu Province.  The modules shipments will be complete by the end of the December 2013, suggesting all the sales will end up recorded yet in the current fiscal year.

The Three Gorges sales is not an isolated good news story.  Last month Canadian Solar started work on a 100 megawatt utility-scale solar farm in Ontario for Samsung RenewableEnergy.  The company also won a contract to supply solar modules for a solar power project in Saudi Arabia being built by Saudi ARAMCO, one of the world’s largest crude oil producers.

The trio of analysts who have published estimates for Canadian Solar already through the company could deliver $2.0 billion in sales and $0.47 in non-GAAP earnings per share in the current fiscal year.  This represents a bit over 50% growth over the prior year.  This not a bad feat in a sector that was at one point nearly written off as competition from low-price photovoltaic modules from China threatened to put North American and European producers out of business.

To be sure, Canadian Solar experienced a sharp drop in sales in the last year and even the first quarter of 2013.  However, this year beginning in the June quarter the company turned things around, registering the first year-over-year increase in quarterly sales in three years.  It now appears possible for the company to get back to set a record in sales value.

Profits have been improving as well  -  at least the net loss has been getting smaller with each reported quarter.  The company has reported strong cash generation in the past as well as net profits.  Investments in new solar projects are reported in operating cash flows.  Because of the size and long-term nature of some solar development projects, operating cash flow can be dramatically impacted.  In 2012, a solar project under development took a $300.7 million bite out of cash flow from operations.

Even if profits spark investor interest in CSIQ, they will need to temper their enthusiasm, at least in the short-term.  A review of historic trading patterns in CSIQ suggests the stock has recently risen to over-bought territory.  It would be prudent to wait for a period of trading weakness to take on long positions in the stock.  Still at the current price level the stock is trading at 10.0 times the 2014 consensus estimate.  While this is above the company’s current growth rate it is still an attractive valuation.  For an investor with a long-term investment horizon the current price level justifiable.
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.

Clouds Lift For Canadian Solar And Suntech

Doug Young 

sunset breaking
through clouds.jpg
Sun breaking through clouds photo by Tom Konrad

Spring is most definitely in the air this week for embattled solar panel makers, with Canadian Solar (Nasdaq: CSIQ) and Shunfeng Photovoltaic (HKEx: 1165) emerging as new sector leaders with different pieces of upbeat news. From my perspective the Canadian Solar news is the most exciting, even though some may say it doesn’t come as a big surprise. The company announced it will post a net profit for the third quarter, becoming the first major solar firm to return to the black after 2 years of losses. Meantime, Shunfeng has announced details of its highly anticipated deal to buy the main assets of bankrupt former solar pioneer Suntech (NYSE: STP), marking a major step forward in the industry’s restructuring.

Investors welcomed both pieces of news, sharply bidding up shares of all 3 companies. Canadian Solar’s American Depositary Shares (ADSs) jumped 12 percent to $28.65, taking them to levels not seen for 3 years. Anyone smart enough to buy the stock a year ago at its low of about $2 would be getting quite a nice return on that gamble. Shunfeng shares shot up 20 percent on its news, as trading in the stock resumed after a one week suspension. Suntech shares also rallied 17 percent, indicating its stockholders believe their shares will still be worth something when the company finally emerges from its bankruptcy.

Let’s start off with Canadian Solar, which issued a third-quarter results preview that looked quite sharp all around. (company announcement) The company raised its outlook for shipments by about 18 percent, saying it now expects to ship 460-480 megawatts of panels during the quarter. But more impressive was a huge upward revision to its gross margins, which are now expected to come in at 18-20 percent, up sharply from previous outlook for 10-12 percent.

That sudden surge in margins was likely a major factor behind the company’s forecast that it would post not only a net profit for the third quarter, but also for the first 9 months of the year. Canadian Solar had posted losses in this year’s first 2 quarters, but repeatedly stuck by its forecast to be profitable for the year. I’ve said before that Canadian Solar’s model of constructing and then selling solar plants looks like a good one, and its emergence as the first major company to return to profitability also looks like a strong sign that it will emerge as a future sector leader.

From Canadian Solar let’s move on to Shunfeng, which announced it will pay 3 billion yuan, or nearly $500 million, to acquire most of Suntech’s main assets in its hometown of Wuxi. (company announcement) Upon completion of the investment, Suntech’s main manufacturing unit will become a wholly owned Shunfeng subsidiary. It looks like a big chunk of Shunfeng’s new investment will go to repay some of Suntech’s many creditors, including ones holding more than $500 million in bonds that Suntech defaulted on earlier this year, forcing it into bankruptcy.

This new cash infusion follows Suntech’s announcement of another $150 million investment last week from Wuxi Guolian, a fund linked to Suntech’s hometown government. (previous post) It’s interesting to note that this combined cash infusion of some $650 million is significantly larger than Suntech’s current market value, which still only stands at $280 million even after the strong rally on news of the Shunfeng investment.

I previously predicted Suntech’s emergence from bankruptcy could still be 7 or 8 months away, due to a seizure of company assets in Italy and an involuntary bankruptcy against the company in New York. But this latest rally in Suntech’s stock seems to imply that its shareholders believe they will get at least some money for their stock, which could either be allowed to continue trading on Wall Street or possibly swapped for Shunfeng shares later.

Bottom line: Canadian Solar’s return to profitability and Shunfeng’s $500 million investment in Suntech indicate an overhaul of the solar sector is accelerating, as some producers start to return to profits.

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.

November 05, 2013

Four Green Dividend Stocks That IPO'd In 2013

Tom Konrad CFA

Disclosure: Long BEP, HASI.

Canada’s stock exchanges have long had the lead as the place for energy infrastructure companies to list.  This includes green energy, as well as the fossil fueled sort.   Because Canada’s reporting rules are somewhat less stringent, and its markets less liquid than those in the US, the large number of offerings trade at lower valuations and higher yields than do their (few) US-listed equivalents.

In fact, it was the promise of a higher valuation which led Brookfield Renewable Energy Partners (NYSE:BEP, TSX:BEP-UN) to obtain its US listing on June 11th.  Brookfield had planned a secondary stock offering, which it delayed on June  20th because of “current capital market conditions.”  Although the stock has risen as high as $31 in anticipation of the US listing, rising interest rates had lowered its stock price to the $26 range shortly after the stock began trading in New York.

Even with the decline, however, Brookfield still offers at a dividend yield lower than its Canadian-listed peers.

US Stocks

Despite the higher yields on offer in Canada, many US investors prefer investing at home.  Part of that is undoubtedly because they find recovering Canada’s foreign tax withholding on dividends through the US Federal tax credit onerous (or impossible, if they are investing through a retirement account.)  Note that BEP’s distributions are still subject to this withholding, despite its US listing.

The reluctance to buy Canadian stocks also stems in part from concerns over the lighter disclosure rules on Canadian exchanges, the lack of liquidity, or simple unfamiliarity with trading foreign stocks.  Whatever the reasons, three recent IPOs and Brookfield’s listing have created a new, if short list of US listed green income options.  These are:

Brookfield Renewable Energy Partners, L.P.

Exchange/Ticker: NYSE:BEP

Portfolio: 3705 MW Hydropower, 777 MW Wind, 45 MW Hydro under construction.

Recent Stock Price & Declared Quarterly Dividend (Yield): $26.76, $0.3625 (5.4%)

Expected 2014 Dividend (Yield): $1.45 (5.4%) or more

Comments: Dividends are subject to Canadian tax withholding.

Hannon Armstrong Sustainable Infrastructure

Exchange/Ticker: NYSE:HASI

Portfolio: Bond-like investment mostly in Energy Efficient performance contracts, plus other sustainable infrastructure including solar and geothermal.

Recent Stock Price & Declared Quarterly Dividend (Yield): $12.34, $0.06 (1.9%)

Expected 2014 Dividend (Yield): $0.93 (7.5%) – my estimate based on statements from management.

Comments: HASI is a REIT, and so does not pay corporate tax.  Distributions are taxed to investors as ordinary income.

Pattern Energy Group Inc.

Exchange/Ticker: NASD:PEGI

Portfolio: 1041 MW wind in the US, Canada, and Chile.  270 MW Wind under construction in Ontario, CA.

Recent Stock Price & Declared Quarterly Dividend (Yield): $22.71, $0.3125 (5.5%)

Expected 2014 Dividend (Yield): $1.25 (5.5%).

Comments: I recently looked at PEGI in depth here.

NRG Yield

Exchange/Ticker: NASD:NYLD

Portfolio: 101 MW Wind, 253 MW solar (60 MW more under construction), 910 MW natural gas, 1098 MW (thermal) of heating or cooling projects supplying thermal energy (and a little electricity) directly to businesses.

Recent Stock Price & Declared Quarterly Dividend (Yield): $34.99, $0.23 (2.6%)

Expected Future Dividend (Yield): $1.44 (4.1%) – this is Goldman Sachs analysts’ estimate, and I’m not certain of their expected time frame.

Comments: I recently looked at NYLD in depth here.

Portfolios for US green div stocks.png

For a US investor looking for income in green energy, Hannon Armstrong seems a compelling addition to the portfolio.  Brookfield and Pattern also seem worth including for added diversification and income.  NRG Yield, is not nearly as green as the others, despite its the recent headlines about its solar investments.  Its expected dividends also seem low to justify its current price, at least compared to the other three options listed here.

This article was first published on the author's Forbes.com blog, Green Stocks on October 25th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 04, 2013

BYD Hits California Speed Bumps

Doug Young 

Speed bump photo via BigStock

After a year of relative calm in which its shares have surged, electric vehicle (EV) aspirant BYD (OTC: BYDDF; HKEx: 1211; Shenzhen: 002594) is once embroiled in a couple of mini-scandals involving its labor practices and technology in California. While I doubt that either of these problems will have a long-term impact on the company, they do highlight the many speed bumps that BYD and other Chinese automakers will face as they move into the global marketplace. The risks are particularly high for BYD, which is 10 percent owned by billionaire investor Warren Buffett, since the company is relying heavily on global markets to fuel its EV business.

The bigger of these 2 mini-scandals has made headlines around the US, and saw BYD fined $100,000 for breaking California’s tough labor laws. (English article) Such labor law violations aren’t all that uncommon, especially for a company like BYD that hasn’t done much business in the US. I suspect the main reason this story attracted so much attention was due to BYD’s Warren Buffett connection. The company was fined the amount for violating California’s minimum wage law, and also for failing to provide some pay documentation to the state.

BYD has responded by saying it was the victim of a misinformation campaign by a labor advocacy group, and that it plans to hire more workers as it ramps up its EV bus production at a newly built local plant. (company statement) According to BYD, the controversy stems not from the wages it pays to locally-based California employees but rather from wages paid to some of its China-based technicians who are on site at the new plant to train local workers.

As I’ve already said, this case doesn’t look too significant to me and I doubt there will be any long-term impact on BYD’s US plans. But it does spotlight the potential conflicts the company could face in many of the global markets where it is trying to expand, which run the range from emerging markets in Argentina to developed ones like Britain and Germany.

byd logo

The second setback involves BYD’s technology as the company works with the city of Long Beach, one of its main electric bus customers in California. (previous post) BYD has just built a plant to manufacture its electric buses in California, and now some local media are reporting that 7 of 9 bus sub-assemblies that were made at the plant failed to get approval by the Long Beach government. (English article) The failure to win approval looks related to a series of quality problems with the new plant as it revs up production.

Again, I would expect that this kind of quality problem is probably the result of launching a new facility rather than a long-term issue related to BYD’s technology. If that’s the case, then presumably BYD will fix the issues as the plant gains more experience and this kind of problem will soon disappear.

Both of these issues come as BYD’s prospects have improved greatly over the past year, igniting a rally that has seen its stock double since January. In its latest quarterly results announced this week, the company forecast its profit could rise as much as 7-fold this year, mostly on improving sales for traditional gas-powered cars. (English article)

But the company has also said it plans to start phasing out its gas-powered cars and eventually leave the business, focusing instead on EVs. Its EV sales are still tiny and mostly confined to a number of pilot programs both in China and abroad. To keep its rebound alive, those pilot programs need to start showing some results soon and contributing to the company’s top and bottom lines. That looks increasingly likely, though these latest California setbacks show there could be some hiccups along the way.

Bottom line: Two mini-scandals for BYD in California looks like minor setbacks, but reflect obstacles the company and other Chinese automakers will face in their global expansions.

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.

November 03, 2013

Suntech Has A Friend In Wuxi But Foes In NY

Doug YoungSuntech logo]

Former solar energy pioneer Suntech (NYSE: STP) is getting caught in an increasingly complex web of global forces as it tries to emerge from bankruptcy, with the latest coming from its hometown of Wuxi and from a bankruptcy court in New York. While such tugs-of-war probably aren’t uncommon in such a complex case, Suntech’s strong international connections mean its reorganization could take longer than many previously expected. The case also highlights the unusual risks associated with companies that do so much trans-border business. The latest developments have seen Suntech’s hometown of Wuxi emerge as a major new investor in the company, and a group of debtors force it into a US bankruptcy court.

Company watchers will know that Suntech has many international connections. Its headquarters is in China, while its shares trade on the New York Stock Exchange. Its largest market is Europe, where it controls the Global Solar Fund that builds solar energy plants. Finally, the company also has billions of dollars in debt held by institutional investors from around the world, and billions more in outstanding loans from major banks in China.

Given that complex background, it’s not too surprising to see everyone trying to get a piece of Suntech as the company struggles to get back on its feet after being forced into bankruptcy earlier this year in a court in its hometown of Wuxi. At least some of Suntech’s overseas bond holders don’t seem to think they will get a good deal from the Wuxi court, which could be true since the judge may favor the company’s China-based stakeholders over foreign investors.

Those concerns have led a group of foreign bondholders to petition to have Suntech forced into a US bankruptcy court in the state of New York, a move that Suntech strongly opposes. (company announcement) I’m no expert on bankruptcy law, but the investors behind this move most likely believe the New York court will accept the case because Suntech’s shares are traded in New York. Suntech points out that the bond holders behind this move are a very small group, though I doubt that fact will persuade the New York judge to dismiss the case.

Meantime, Suntech has also announced that Wuxi Guolian, a fund presumably controlled by its hometown government, has signed a letter of intent to invest $150 million or more in the company as part of its reorganization. Wuxi Guolian is making the commitment even though the bankruptcy court hearing the case has already selected another firm, Shunfeng Photovoltaic (HKEx: 1165), to become Suntech’s strategic investor going forward. (previous post)

This new investment by Wuxi Guolian, if it happens, looks like a power play by the Wuxi government to ensure that Shunfeng doesn’t take control of Suntech and then close down all of its Wuxi operations. Such a limitation could seriously hamper Shunfeng’s efforts to reorganize Suntech’s main operations in Wuxi, forcing Shunfeng to keep operating facilities that it might otherwise want to close or relocate.

At the same time, Suntech is also grappling with some of its European assets, which were built by Global Solar Fund and have now been seized by a court in Italy for possible regulatory and other violations. On the whole, this story is certainly getting quite messy due to Suntech’s complex web of global connections. I do think the China-based groups will ultimately win the battle for control of the company, but it could be another 7 or 8 months now before Suntech can finally complete its reorganization and emerge from bankruptcy.

Bottom line: Suntech’s reorganization will take longer than expected due to a growing number of international claims against the firm, including a new bankruptcy petition in New York.

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.

November 02, 2013

Solar Income, Really?

Tom Konrad CFA

NRG Yield logo.png

Disclosure: Long BEP, HASI.

NRG Yield (NYSE:NYLD) was spun out of its parent, NRG Energy, Inc. (NYSE:NRG) in July, and has since been greeted with enthusiasm by investors.  The stock priced at $22, 10% over the mid-point of its expected range, and the underwriters exercised their full over-allotment option.

NRG Yield presents itself as an owner and operator of contracted renewable and conventional electricity generation, as well as thermal infrastructure assets.  (Thermal infrastructure provides heat or cooling to businesses for use in their operations.)  The company has a green tinge because of its wind and solar generation, and seems to be designed to appeal to green investors who also like the green of a substantial dividend yield.

How Green Is It?

NYLD segments.png
Data: NYLD SEC Filings

Although I manage green portfolios professionally, I was not particularly interested, mainly because the company does not seem all that green.  Renewable energy only accounts for 30% of revenues, or 43% of assets and income (see chart.)  This is greener than most independent power producers, but there are many income stocks with greener portfolios available.

Show Me the Green

That said, most income investors care more about the green an investment pays out in dividends than the greenery of how it makes that money.  NRG Yield has yet to pay a dividend, but the most recent quarterly report states: “NRG Yield, Inc. expects to declare and pay a dividend of $0.23 per Class A common share during the fourth quarter of 2013.”

At the IPO price of $22, this would have amounted to a less than stunning 4.2%annual yield, but since then, investors have bid the stock up to $34.60, reducing the yield to 2.7%.  However, analysts at Goldman Sachs expect NRG Yield to raise its dividend further.  They recently issued a new price target of $41 based on a 3.5% dividend yield (corresponding to a $0.36 quarterly dividend.)


Even the 4.2% yield offered by Goldman’s future dividend estimate at the current price of $34.60 seems low to me.

Completely green income alternatives such as Pattern Energy Group (NASD:PEGI), Brookfield Renewable Energy Partners (NYSE:BEP), and  Hannon Armstrong Sustainable Infrastructure (NYSE:HASI) all compare favorably on yield.  Pattern Energy owns a portfolio of wind farms, and expects to start paying a $0.3125 quarterly dividend (5.4% annual yield) in the fourth quarter, when NRG Yield will only be paying 2.7%.

Brookfield Renewable is already paying a $0.362 quarterly dividend (5.3%) and owns a portfolio of hydropower, wind, and solar generation.

Hannon Armstong’s business is less comparable, since it invests in energy efficiency projects and other sustainable infrastructure.  As a REIT, dividends may be subject to higher tax rates than the other three, but its CEO has said that it will declare a dividend in excess of $0.219 for the fourth quarter (7.4%), and will eventually ramp up to $0.234, or 8% based on the current $11.76 share price.  Even if we adjust Hannon Armstrong’s expected dividend down by 15% to reflect a 35% income tax rate rather than the 20% rate on qualified dividends, it’s expected yield is 6.8%, 2.6% higher than the yield Goldman is predicting for NYLD.  Such an adjustment would not be necessary for an investor in a lower tax bracket or one investing through a retirement account.


Given the other green income options available on US exchanges (not to mention more attractive yields available in Canada,) I fail to see the attraction of NRG Yield.

Looking at recent news articles, I can only guess that investors are giving the company a “green” premium based on frequent mentions in articles about solar.  That would be ironic, given that NRG Yield’s greenery is even less compelling than its yield.

This article was first published on the author's Forbes.com blog, Green Stocks on October 23rd.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 01, 2013

Investors Expect Rapid Growth At Pattern Energy Group

Tom Konrad CFA

Pattern Energy's Gulf Wind Farm in Armstrong, Texas

Disclosure: Long BEP.

Pattern Energy Group (NASD:PEGI, TSX:PEG) completed a very successful Initial Public Offering (IPO) on the Nasdaq and Toronto stock exchanges on September 27th.  Not only did the shares price at $22, near the top of the expected range, but the underwriters exercised their full over allotment option to purchase 2.4 million shares in addition to the initial 16 million offered.  Total proceeds from the offering were $404.8 million.  Most of the proceeds went to Pattern Energy Group, LP (PEGLP) in consideration for a number of contributions and class A shares sold in the offering, but $56 million will be used to pay down debt and $60.2 million will be retained for general corporate purposes.

Investors greeted the offering enthusiastically, and the stock is trading comfortably above the offering price at around $23 per share since the IPO.

The Company

Pattern owns six wind power projects in the US and Canada with total capacity of 1040 MW and two development projects in Ontario (270 MW) and Chile (115 MW) which are expected to enter production in 2014.  Post-IPO, public shareholders will control only a minority of the company’s common stock.  Control of the company is held by PEGLP, which, along with its partners, will control 63.1% of voting rights through as combination 47.4% of Class A shares and 99% of Class B shares.  Management owns the remaining 1% of Class B shares.  Class B shares do not currently pay a dividend, but will convert into Class A shares at the end of 2014, or upon commercial operation of the Ontario Wind farm, if that has not yet occurred.

Distributable cash flow for 2014 is expected to be approximately $55 million,80% of which the company plans to pay to shareholders as a quarterly dividend of $0.3125 per share.  Achieving this cash flow will depend on the on-time completion of the Ontario and Chilean wind projects.  At $23 a share, $0.3125 quarterly amounts to a 5.4% annual dividend.

While completion of the Ontario and Chilean wind projects in 2014 can be expected to increase distributable income, conversion of Class B into Class A shares will offset this in 2015 by increasing dividend-paying shares by 29%.  As a back-of-the-envelope estimate, if the income from the new wind farms is comparable to the existing wind farms on a per MW basis, we can expect distributable income to be increased by 37%.  Given the wide range in profitability of wind farms, however, I feel it is safer to assume that the increased income from the Ontario and Chilean wind farms will only serve to offset the share dilution.

After the transaction, Pattern’s capitalization will be approximately 67% debt, and 33% equity, which is stronger than its closest comparable, Brookfield Energy Partners (NYSE:BEP, TSX:BEP-UN), which has about 20% equity and preferred equity.  Brookfield’s longer track record and larger and more diversified portfolio of hydropower, wind, and solar assets should allow it to offer a lower yield than Pattern, but at $27.43, Brookfield’s yield of 5.3% is almost identical to Pattern’s.


Pattern’s shareholders seem to be betting on Pattern achieving rapid growth, or at least faster growth than comparable companies such as Brookfield.  However, most of its growth in distributable income over the next two years is likely to be offset by the increased number of shares paying dividends, when class B shares convert to class A shares.

At the current price, Pattern Energy Group seems fully valued relative to its US-listed peers, and expensive relative to clean energy power producers with only Canadian listings.  As such, the stock may be useful to increase the diversification and income in a clean energy stock portfolio, but it will probably not produce much share price growth in the near future.

This article was first published on the author's Forbes.com blog, Green Stocks on October 22nd.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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