« February 2014 | Main | April 2014 »

March 31, 2014

Finavera Wind Energy: Bak From The Dead

Tom Konrad CFA

Disclosure: Long FNVRF, short PEGI $30 and $35 calls, $20 and $25 puts.

The Good News

Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) shareholders have had a long and trying wait for the sale of its wind projects to Pattern Energy Group (NASD:PEGI) since the deal was announced in December 2012.  The timeline has slipped repeatedly, two of the projects proved impossible to permit, and there have been questions about just how large the remaining ones would be.  The long silence since the company’s interim financial update last November has probably led many investors to give the company up for dead.

Rumors of the company’s demise were premature.  On March 17th, Finavera announced that it had “executed agreements that provide for the Assignment of the 184 MW Meikle Wind Energy Project Electricity Purchase Agreement (‘Meikle EPA’) from Finavera to Pattern.  The assignment of the Meikle EPA from Finavera to Pattern is the last major milestone outstanding to close the Pattern acquisition of the Meikle project for gross cash consideration of $28 million.”

The key numbers here are 184 MW and $28 million.  Those correspond to a strong wind regime at Meikle, allowing the Meikle and nearby Tumber Ridge projects to be consolidated into one giant “Super-Meikle” project.  I spoke to Finavera CEO Jason Bak by phone later the same day, and he confirmed that this was the case.  There is  a wind speed adjustment in the contract with Pattern which could reduce the $28 million figure by $1 to $2 million.

The 116MW of PPAs which the announcement stated had been canceled are likely the Wildmare (77 MW), Bullmoose (60MW), 47 at Tumbler Ridge (47MW)  projects, after allowing for the 67 MW expansion of Meikle over the earlier 117 MW plan.  Bak says Meikle was re-designed and expanded to accommodate additional turbines.  While the other three PPAs have been canceled, other permits remain in place.  Over the longer term, Finavera could yet see some revenue from Wildmare, Bullmoose, or Tumbler Ridge.

The announcement is unadulterated good news.  More confirmation can be had that this is a better-than-expected outcome in Pattern’s 2013 Annual Report, page 63 of which conservatively lists the Meikle project as a 175 MW (not 184 MW) pre-construction project.


Bak tells me that he expects the Meikle sale to close in the next few weeks, which will trigger a $10 million payment from Pattern to Finavera, which Finavera will use to repay the project loan from Pattern made last year.  In addition to that $10 million, Pattern has demonstrated its confidence that this project will go forward by spending $4 million in development costs to date.  An additional $2 million may be spent to bring the project to financial close in late 2014 or early 2015.  All but $2 million of this $4 to $6 million of this will be deducted from Finavera’s final payment, but Pattern will not be reimbursed for these expenses if the project does not close.


The 184 MW project size and $28 million (elsewhere $27.9 million – $26.5 after wind speed adjustments) gross payment remove the largest piece of uncertainty regarding Finavera’s value going forward.   Below, I give my estimates Finavera’s net cash position after Meikle’s financial close and the final Cloosh payment over the next six to twelve months.

Assets: (Canadian $ except €)

Expected proceeds from Pattern: $26 million to $27.9 million, after wind speed adjustments.

Expected Payment for Cloosh Wind Farm: €7.14 ($11. million.)  This project has also been delayed, and is now expected to close in 2014.

Value of 10% interest in Cloosh: $3 million to $4 million

Other potential upsides:

Potential value in Wildmare, Bullmoose, or Tumber Ridge.

Value in the new business opportunity Bak plans to present to shareholders after the Pattern sale is finalized in the next few weeks.


Liabilities on Interim Report: $24 million to $26.9 million (the low end may result through negotiations with creditors.)  $2.4 million of these liabilities are secured by Cloosh, and are payable only from the proceeds from Cloosh.

Finavera’s share of Meikle development  costs: $2 million to $4 million, payable out of final Meikle incentive payment.


$9 million to $17 million. My best guess: $12 million.

Shares Outstanding

39.7 million

Options Outstanding

2.46 million at $0.085.  (42.2 million shares outstanding if exercised for $0.21 million.)

Value Per Diluted Share

$0.21 to $0.40 ($0.19 to $0.36 US).  Best guess: $0.28 ($0.26 US)

The future

The press release also stated that

Finavera continues to work diligently on a strategic plan for the Company. The imminent close of the Pattern transaction will provide a solid platform for the next stage in Finavera’s development. Further information on the Company’s strategic plan will be released following the close of the Pattern transaction.

As Bak has said all along, there will be a shareholder vote on the use of the proceeds, including the option to return them to shareholders.  He has been working on the strategic plan mentioned above for at least half a year.  He told me that he has not been willing to bring it to shareholders until he has the working capital to pursue the opportunity.  Bak seems very confident that shareholders will like the strategic plan when they see it.  If they don’t, they will have the opportunity to vote for a cash distribution from the wind farm proceeds, instead.

Bak also told me that he expects to issue more frequent updates on the company’s prospects over the coming months.


Given the years of delays and disappointments, it’s not surprising that Finavera’s stock has been trading at only 8 Canadian cents.  I expect that the elimination of a major source of uncertainty and the final size of the Meikle project will finally breathe life into the stock.  More frequent updates from the company going forward may also bring investor interest “Bak” from the dead.

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

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

Finavera Wind Energy finalizes PPA for 184 MW “super-Meikle” project, removing the greatest source of uncertainty regarding the company’s valuation.

March 30, 2014

SolarCity: Overpriced or Opportunity?

Does SolarCity (SCTY) look like a good investment at current prices? The most recent financials released by SCTY fills out the picture of how this unique company performed for 2013. Do the numbers justify the outsized stock performance, which has risen 222% in the past 12 months, and 384% since its Initial Public Offering in December 2012? Or on the other hand, are recent filings more reflective of the 42% drop since the highs of a month ago? This article will follow the data to see where this distinctive energy stock stands now, and forecast where this dynamic solar company may go from here.


Figure 1. SolarCity Revenues.

SolarCity Revenues Are Climbing…

First the good news: sales have been steadily gaining for SCTY. Figure 1 shows that sales, or revenues, are up 29% from 2012 levels, and almost triple what they were in 2011. Revenues came in at the high end of projections made in November 2013. Gross profits, accounting costs of revenue such as operating leases, incentives and sales (but not expenses or other losses), have also been growing.

…But Profits Are Falling

Profits for the company, however, are a different story. Figure 2 shows that net losses have been growing, over double now what they were in 2011. Figure 1 points out that revenues are not the problem, it is the expense side of the ledger keeping the company in the red. This divergence between revenues and net income, can clearly be seen on a quarterly basis in Figure 3.


Figure 2. SolarCity Losses.


Figure 3. SolarCity quarterly revenue and income.

Classifying SolarCity Debt

It is always beneficial to look at debt when evaluating a company’s financial health. When debt ratios are compared to industry-wide levels, a clearer picture emerges of whether a company is successfully deploying debt, or if it is swimming in financial liabilities.

Figure 4. SolarCity total liabilities to total assets.

Figure 5. SolaCity current ratio.

This type of comparison poses a challenge for SolarCity, because it is a hard company to classify. Most financial websites mistakenly put SCTY in the semiconductor industry, since the majority of solar companies are in this business sector. The SEC classifies SolarCity in Construction Special Trade Contractors which is partially true, but does not fully cover its business model.

I see SolarCity more as a financial company, because of the way it interacts with its clients through financing, lease arrangements, notes, etc, and how those instruments appear on the liability side of its balance sheet. Additionally, looking at debt for financial companies is different from other sectors. In many ways, their business is debt. This is all the more reason why classifying SCTY correctly is important when making industry comparisons.

Figures 4 and 5 show how SCTY stacks up against debt levels of the industries mentioned above. The ratio of total liabilities/total assets has been consistent for SolarCity over the years, and came down slightly in 2013. Though SCTY is higher than semiconductors and construction services, it is well below the average for the financial sector.

The current ratio is a measure of a company’s shorter-term debt, and the higher the number the better. On this measure, SolarCity appears to be more of concern when compared to industry averages.


Figure 6. SolarCity client growth.

SolarCity Client Growth

Despite the difficulties outlined above, there is much that SolarCity has been doing right. Figure 6 shows how SCTY has been successfully executing its business plan by growing its customer base at an extremely rapid pace. Keeping up this growth is essential to becoming profitable, and SCTY shows no signs of slowing its expansion.

If you dig in to these numbers more deeply, however, a mixed story again emerges. As seen in Figure 7, total revenues per customer have been steadily declining. This is to be expected. As SolarCity moves more and more into home and small business installations, revenues per customer get diluted when compared to its larger utility-scale clients. So long as client growth continues at a decent pace, falling total revenues per customer is not a grave concern.


Figure 7. SolarCity client ratios.

Net revenues per customer have also been improving for SCTY. In a company’s early stages, net loss per customer should shrink as revenues grow. This has been the case, with levels in 2013 about 31% better than 2012. It is crucial that this ratio continue to improve if SCTY hopes to get in the black in a timely fashion.

A key way to see how this is progressing is to watch SolarCity’s acquisition cost per customer. This ratio has been shrinking, but not at the pace one would hope. In fact, in 2013 acquisition cost per customer seems to have stabilized at 2012 levels. I will be watching this number very closely to evaluate when, or whether, SCTY will be on track to turn a profit.

Overpriced or Opportunity?

Without having access to SolarCity’s inner cogs, my back of the envelope calculations show that the company may be many years out until it enters into positive earnings territory. If total revenues per customer levels out in the $1,500 range, and operating expenses stay at current levels, then SolarCity will need to double the +/-100,000 clients that it currently has before it turns a profit. Even at the current rapid rate of client growth, it would take SolarCity two years to get to the 200,000-client level.

SolarCity has a lot of moving parts, so it is surely possible that revenues could advance quicker than my estimates, and/or expenses could become much tamer. In addition, SolarCity’s business model is quickly evolving, so unknown developments may greatly change its financial landscape. SolarCity is likely priced to perfection at current levels, but I would not discount this company as a profitable long-term investment.


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

About the author

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

March 29, 2014

Gevolution 2014: Gevo's Progress, And Detours

Jim Lane

This week, Gevo (GEVO) reported its year-end results, generally in line with expectations, with a $0.35 loss per share and $24.6M in the bank. Given the company’s rate of progress with isobutanol, the cash burn rate, the low share price, and high prices for ethanol — the company announced that it is “transitioning the Luverne plant to the production of both isobutanol and ethanol…Producing both ethanol and isobutanol allows Gevo to fully utilize the Luverne plant and increase cash flow as Gevo continues to commercialize its isobutanol production capabilities.”

“Our original vision was to focus our efforts on one product,” said CEO Pat Gruber. “However we now are confident that we can leverage the flexibility of our technology and more fully utilize all the operating units in the plant to produce ethanol simultaneously with isobutanol. Needless to say, the expected additional cash flow is a benefit as we work to maximize the learning per dollar as we scale up our technology.

“Therefore, we plan to run three of our fermenters to produce ethanol, while the fourth fermenter will remain dedicated to isobutanol production. We are calling this configuration “side by side”, meaning both ethanol and isobutanol could be produced concurrently.

Analyst reaction

Rob Stone and James Medvedeff, Cowen & Co:

The economics now favor, and the science now enables, concurrent production of isobutanol and ethanol at Luverne. However, we believe ramping to full nameplate, regardless of configuration, is still at least several quarters away.

Luverne is shifting to concurrent production of ethanol and isobutanol, to take advantage of current wide ethanol spreads. The initial mix will be three fermenters producing ethanol, one producing isobutanol. We believe this demonstrates the flexibility of the GEVO technology, and highlights successful isolation and eradication of sources of infection. It may have been influential in attracting the two licensing LOIs signed since October. Important side benefits include more stable flows of corn mash, water recycling, and solids removal (animal feed) from the plant, the opportunity to optimize operations at higher production rates, and reduced cash burn.

Mike Ritzenthaler, Piper Jaffray

The decision to produce ethanol ‘side-by-side’ with increasing isobutanol production rates will be controversial – but ultimately we view as a positive for cash (with spot ethanol EBITDA margins >$1/gallon) and provides more stable operating parameters. This will further aid isobutanol optimization efforts that have seen ~71% of target gallons per batch and a lift to 1-2 batches per week on average (from 1-2 batches per month in December). We are adjusting our estimates due to incremental ethanol sales that we did not previously factor into our model.

We expect ethanol production to start in mid-May and reach a 15k gallon/year run-rate starting in 3Q13, resulting in FY2014 Sales of $45 million. Ultimately, however, we see ethanol production at Luverne tailing off in 1H15 as isobutanol continues to ramp. This results in FY14E revenues of $45.4 million (from $14.5 million) and ($20.7) million in EBITDA, from ($36.5) million previously.

This should make the technology package more attractive to potential licensors while investors should welcome the cash flow attributes of ethanol production as isobutanol production ramps, in our view. Our price target is based on 5x our FY15 EBITDA estimate (from FY15 EBITDA discounted to 2014), with $0 million in net debt and 49 million shares.

Progress with the Process

Gevo reported in this cycle the following process improvements:

• Commissioned a proprietary system to sterilize corn mash.
• Proven that its two key technologies, our isobutanol producing yeast and our GIFT system, work at commercial scale utilizing full corn mash to produce isobutanol.
• Achieved up to 71% of our targeted gallons per batch goal.
• Produced isobutanol that met quality targets.
• Demonstrated that the company can manage infections during fermentation, achieving over 100% of goal, although not with the consistency or reliability that we need.
• Operated all of the fermenters and GIFT systems and they performed as expected.
• Begun the integration of the water recycle streams, and achieved greater that 90% water recycle in fermentation.

The Licensing Option

On March 6, 2014, Gevo announced that Porta Hnos signed a letter of intent to become the exclusive licensee of GIFT in Argentina to produce renewable isobutanol. Porta is a 131 year old family owned company in Argentina that produces liquor, vinegars and has a 120 m3/day corn ethanol plant (approximately 12mgpy).

In addition, Porta has designed and built two 250 m3/day ethanol plants for others and they are working on two more ethanol plants for 2014. Half of all current ethanol plants in Argentina were designed by Porta, and they have a joint venture with Alpha Laval to provide separation and evaporation expertise.

Offtake and testing: the Q4 highlight reel

In Q4 2013, Gevo began selling bio-isooctane for specialty fuel applications such as racing fuel. Gevo’s renewable isobutanol from Luverne, Minn. is being converted into bio-isooctane at its biorefinery at South Hampton Resources. Initial volumes are being used for testing purposes.

Also in Q4 2013, the U.S. Army has successfully flew the Sikorsky UH-60 Black Hawk helicopter on a 50/50 blend of Gevo’s ATJ-8 (Alcohol-to-Jet). This testing is being performed as part of the previously announced contract with Gevo to supply more than 16,000 gallons to the U.S. Army. Gevo’s patented ATJ fuel is designed to be the same as petroleum jet fuel, and to be fully compliant with aviation fuel specifications and provide equal performance, including fit-for-purpose properties.

In December, Gevo announced that Underwriter Laboratories approved the use of up to 16% isobutanol in UL 87A pumps, providing all of the service stations across the country with the assurance that isobutanol blended gasoline will work in their current gasoline pumps without the need to purchase new equipment.

The Move to Ethanol

Let’s be frank about this — for a long time, Gevo has taken a dim view of the first generation biofuels it now proposes to produce. “1st generation biofuels created conflict,” the company noted earlier, citing that refiners lose volume, pipeline companies lose volume, customers get lower energy fuel and ethanol producers struggle with the blend wall, with the push for ethanol causing more conflict.”


The company switched “back to ethanol” once before, in fall 2012, at the time its contamination difficulties were becoming more apparent at scale. “Gevo has successfully demonstrated commercial scale isobutanol production, has navigated idiosyncratic biocatalyst challenges in past scale-ups, and elected to utilize the Luverne asset while the contamination controls are optimized,” Piper Jaffray analyst Mike Ritzenthaler wrote in 2012. Adding, that “the biologists are working to improve the production strain and fermentation parameters to enable better control of competing reactions, a process that in our experience will take a handful of months at most to optimize.”

“The switch to ethanol does not reflect any change in strategy,” Ritzenthaler added. “Management is electing to operate the facility rather than conduct the strain improvement at such a large-scale.”

Having noted all that, Gevo has been consistent in touting the “carbohydrate market” and superior US productivity in this regard, compared to the oil market — as much or more as they have waded into the ethanol-or-isobutanol question.

Doubtless, given normal price environments and steady-state operations in ethnaol and isobutanol, they would generally produce isobutanol. The switch to ethanol reflects the “Market opportunity driven by the spread between carbohydrate and oil” as they have detailed in many presentations. With oil topping $100 and corn sub-$5, Gevo is clearly seeing that the time to produce alcohols is now — and if isobutanol is not yet ready for immediate scale-up, the other alcohol will do nicely.


But there’s a caveat in their strategy. Spreads are high, but they vary, and often quickly. CEO Pat Gruber has been out front with the industry on warming about the dangers of selling the “same” molecule with the “same” price and performance, as this slide illustrates.


Further to that point, one has to consider how much damage has piled up on the Gevo “brand” over the past two years, with the well-publicized difficulties in getting to full production at Luverne — while discussions of a conversion at Redfield seem to have pushed off into the distance. On the potential for selling into markets with a damaged brand, Gruber was stark in his assessment, here:


Gevo’s legion of admirers will be quick to point out that the company’s struggles are not untypical for introducing first-of-kind technology, and they are temporary in nature — causing delays rather than failure — and that the brand of the company is strong with partners like Coca-Cola and the US Army. With a strong brand, Gruber took the view that even a “same” product at the “same” price and performance could have very strong sales prospects, here.


The delays with isobutanol

The delays have been, for its investors and stakeholders, frustrating to say the least. Two years ago, the company was “on track for isobutanol production in 2012″ and expected to be bringing Redfield online in 2013.


We didn’t hear much back then about the time delays associated “Learning to run a ‘new-to-the-world’ process at the scale of our Luverne plant with 1 million liter fermenters requires a lot of work. Working through the issues that arise creates the crucial know-how needed for steady full scale production, expansion, and licensing,” as Gevo reflected on its progress in its latest update.

The company’s strong management team — especailly in managing start-ups with first-of-kind-technology — caused many to underestimate the challenges of scaling this technology. “While every novel process startup contains some uncertainties, we believe Gevo has an outstanding team in place with the optimal expertise needed to understand and mitigate risks – and meet or exceed important production milestones between now and the end of the year,”

Piper Jaffray analyst Mike Ritzenthaler wrote in May 2012. He added in July: “Based on our background and observations, we believe startup is proceeding remarkably well, and we are confident that Gevo’s team can quickly handle normal startup issues, should they arise.”

The biojet options

The company’s struggles with isobutanol have to some extent overshadowed its successes with biojet fuel — passing Army tests with flying colors, and proceeding rapidly towards an adoption of an approved ATJ (alcohol to jet) fuel spec in the not-distant future. The company’s South Hampton demonstration plant has been supporting those efforts.


The isobutanol option

The company would like to produce all-isobutanol no doubt about it: as Pat Gruber pointed out, “isobutanol and its derivatives can serve multiple large markets.” But here’s the caveat, he warned in 2013: “low cost isobutanol is the enabler,” and frankly, Gevo’s yields and throughput is keeping its isobutanol out of all those juicy verticals.


The Bottom Line: the vital importance of getting back to isobutanol

Let’s be clear about restating this: Gevo has never spun a story about a “single molecule” strategy. But they simply have not showcased their ethanol capabilities in this respect. Ethanol has been a sub-optimal fallback. They’ve been much more excited about opportunities with isobutene and renewable jet fuel, for example.


Why? As Gruber warned the industry at ABLC 2012, “drop-in fuels can realign value chains. Refiners gain volume, pipelines too. Downstream logistics costs decrease, consumers get a better product, and there’s no blend wall.”


As we outlined in the Bioenergy Project of the Future series, staring with a first-generation ethanol plant is a great idea. Stating with that technology a while while other technologies are introduced: that’s fine, for a while, But falling back on first-generation fermentation is not a demonstration of production flexibility, in a 19 million gallon facility that is unlikely to be able to compete with the likes of POET and its fleet of 100 million gallons plants, based on economies of scale.

So, this is a temporary move, based around cash conservation, aimed according to analyst estimates at improving EBITDA by an estimated $15.8M in 2014. Coincidentally, about the same amount of capital the company parted with in early 2013 in a $15M share buy-back program. The company also takes the view that it helps to solidify its licensing story, by giving licensees a side-by-side production opportunity in isobutanol and ethanol.

We’re a little skeptical, here in Digestville, about the long-term value of that strategy. Short-term, while the company works through what is proving to be a 3-year scale-up effort, it makes sense. Should ethanol prices hold up, it will certainly help with earnings and cash – though it will tie-up talent, working capital, and divert the focus to some extent. We’ll see shortly how Gevo navigates those waters — as it continues to make steady, if slow, progress towards its game-changing isobutanol ambitions.

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

March 28, 2014

Solazyme Launches Biodegradable Encapsulated Lubricant For Drilling Market

Jim Lane

Enters oil & gas drilling market with world’s first encapsulated lubricant.
Solazyme: “Targeted delivery technology provides improved performance and sustainability.”

In California, Solazyme (SZYM) announced its entry into the oil and gas drilling fluids additive market. Building upon its proprietary platform of high performance, sustainable Tailored oils, Solazyme has introduced Encapso, the world’s first encapsulated biodegradable lubricant for drilling fluids designed to deliver high-grade lubricant precisely at the point of friction where and when needed most.

At the same time, the company announced its intent to offer $100M in aggregate principal notes due in 2019 and 5M shares of common stock. SZYM will also grant the underwriters a 30-day option to purchase up to $15M in notes and 750k shares of common stock.

“We expect the deal to be completed by the end of the week,” said RW Baird analysts Ben Kallo and Tyler Frank. “Although initially dilutive, it should provide sufficient capital to ramp production at its facilities and fund further R&D.” The analysts put a $18 price target in SZYM shares, which closed on March 25 at $13.09.

The drilling fluids markets

The global market for drilling fluids was valued at $7.2 billion in 2011 and is expected to reach $12.31 billion by 2018, according to a report released last summer by Transparency Market Research.

The rise in unconventionals and the growth in deep-sea exploration have driven up revenues for drilling fluids in recent months. One factor that has limited the use of conventional oilbased fluids (as opposed to water-based fluids) have been environmental and sustainability concerns associated with conventional oils.

According to Solazyme, Encapso’s efficacy has been demonstrated both in the lab and in the field in over a dozen commercial wells in a number of basins including the Williston Basin, Denver-Julesburg, and the Permian Basin. Encapso increases drilling speed and control, and protects valuable equipment.

The majority of work so far has been done in horizontal wells, helping demonstrate Encapso’s strong performance capabilities when it comes to “building the curve”—or the point where an unconventional well transitions from vertical to horizontal. This is often when drilling engineers find the most difficulty managing drilling friction. Improving the speed and efficiency of drilling translates directly to cost savings for well operators.

“The demand for energy continues to grow but new sources of fossil fuels are more difficult than ever to recover. As long as the oil and gas industry continues to extract fossil fuels, we at Solazyme view it as an imperative that it is done in a more sustainable way to protect the environment for generations to come,” said Solazyme CEO Jonathan Wolfson. “The drilling industry needs new high-performance and sustainable technologies to meet rising energy demand and increased drilling. Encapso’s unique targeted lubricant delivery system helps reduce the costs for the oil and gas exploration and production industry and provides improved drilling performance.”

Reaction from the customers

“After adding Encapso to the system we saw a rate of increase in our rate of penetration from two feet per hour to 40 feet per hour. Encapso is a game changer because you’re reducing your torque, reducing your drag, and reducing your coefficients of friction all at the same time,” said Philip Johnson, a senior drilling engineer who worked with Encapso on behalf of a major exploration and production company. “No other product on the market does that.”

”Our observation of the product is that it has consistently added value,” said David Cunningham, Regional Manager at Anchor Drilling Fluids, USA. “The biggest impact has come when we’ve seen increases in rate of penetration and reductions in torque.”

“When I learned that this lubricant was encapsulated and therefore would deliver a drilling lubricant in a more targeted way, I saw the tremendous potential benefits,” said Tony Rea, President of Arc Fluids. “I introduced Encapso to a few customers and worked with them on several wells that they were drilling. In all cases, we witnessed marked improvements in directional control.”

The Analysts on Encapso

“Entering into the oil and gas drilling fluids additive market provides SZYM another end market for its products,” write Ben Kallo and Tyler Frank at RW Baird. “This will be important as the company ramps production at its Clinton and Moema facilities. We believe SZYM should be able to secure offtake agreements for the Encapso product line after successfully testing the product in the Williston Basin, Denver-Julesburg, and the Permian Basin and receiving positive feedback from Anchor Drilling Fluids and Arc Fluids.”

The Bottom Line

Another market for Solazyme — and a large one — and one in which high-performance and high-sustainability are known factors for driving revenues. If the company gets real traction in this field, its planned capacity will have to be revised northwards. Towards which its pending cap raise will materially contribute.

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

March 27, 2014

Our Investments Matter

Tom Konrad CFA

Many people consider themselves to be moral, but also feel morality has no place in investing.

There is much argument about whether “Socially Responsible Investing” helps or harms returns, but it is not a moral argument.  Some people believe gambling is immoral, others don’t.  Neither group makes a distinction between the morality of gambling winnings and gambling losses.

The main moral argument people make against socially responsible investing is that buying or selling a few shares of stock won’t have a real effect on giant corporations.  The added emotional distance many people get from investing through mutual funds or ETFs makes this easier to believe.

The question deserves direct scrutiny:

Do the stocks or mutual funds we buy affect the management of the companies we invest in?

This question has two parts.

  1. Do our investments affect stock prices?
  2. Does the stock price affect management behavior?

A company’s stock price is the net result of all investors’ decisions. We’re really asking if a single purchase has a significant effect. This is like asking if throwing a hamburger wrapper out our car window makes a difference. It’s wrong, regardless of if the road is covered with trash or pristine.  A litterbug may be subject to legal fines, but the limited liability structure of modern corporations protects investors from the legal (but not financial) consequences of corporate behavior.  If there is such a moral structure, it is the belief that our investments don’t make a difference in corporate behavior.

How much a company’s stock price affects its behavior depends on how much it needs money. Certain types of companies, like Master Limited Partnerships and Real Estate Investment Trusts must return profits to investors. Others are not profitable enough to fund planned investments. If such companies want to survive or grow, they must obtain the funding from investors. The stock price is always important to such companies because it determines how much control and what share of future profits they must exchange for the needed funds.

For all companies, including profitable ones, a high stock price increases management pay via share options and stock ownership. A low stock price makes a company vulnerable to activist investors and hostile takeover bids. These seek to influence management, or replace it altogether. Managers like high pay, autonomy, and keeping their jobs. If they expect a business decision will cause investors to sell, they will avoid it.

In short, our investments collectively set the stock price, and the stock price influences corporate behavior.  The same applies to bonds and other securities, through the interest rates companies pay.

We may be tiny actors on a giant stage, both in our personal lives and our financial lives. We don’t litter even if we think no one will notice, and we shouldn’t buy companies that do harm even if we think our a single purchase won’t get management’s attention.

Collectively, we have power.  With collective power comes collective responsibility.

This article was first published on the author's Forbes.com blog, Green Stocks on March 16th.

March 26, 2014

China, EU Reach Solar Settlement But More Defaults Loom

Doug Young

China and the European Union have reached a new settlement that should formally end their ongoing dispute over solar panels, contrasting sharply from a more confrontational tack taken by the US in a similar spat. Meantime in other solar news, a looming new bond default by a mid-sized panel maker has become the latest sign that Beijing is prepared to let more of these smaller companies miss their debt payments. That approach will force these smaller firms to either leave the industry or sell their money-losing operations to larger peers, in a much-needed industry consolidation.

Let’s start with the latest China-EU settlement, which involves polysilicon, the main ingredient used to make solar panels. Beijing opened an anti-dumping investigation into EU polysilicon in late 2012, a move that many saw as retaliatory for an earlier EU probe that found Chinese solar panel makers were selling their products in Europe at unfairly low prices. The original dispute centered on complaints by both the US and Europe that Chinese solar panel makers were undercutting their western rivals after receiving unfair government support in the form of subsidies like low-cost land and cheap loans.

China and Europe settled their initial dispute over solar panels last year, in a landmark deal that saw Chinese manufacturers agree to raise their panel prices to a minimum level agreed to by both sides. (previous post) Now this latest agreement will see European polysilicon makers also agree to sell their products into China at a minimum price agreed to by both sides. (English article) The main beneficiary of this new deal is Germany’s Wacker Chemie, which is Europe’s main polysilicon seller to China.

The EU’s 2 settlements contrast sharply with the approach taken by the US, which conducted its own investigation and last year imposed anti-dumping tariffs on Chinese solar panels. As a result, China opened its own probe into US polysilicon, which ended this year with retaliatory anti-dumping tariffs against US-made polysilicon.

On the one hand, I should applaud the EU for its more reasonable and pragmatic approach to this matter, even though the setting of minimum prices has nearly the same effect as imposing punitive tariffs. But that said, I do also think the US approach sends a stronger message to Beijing that it needs to stop its practice of giving money to industries it wants to promote. Perhaps this mixed approach by the US and Europe is the best way to send the message to Beijing, providing both positive and negative incentives to change its behavior.

From that solar dispute, let’s look quickly at the latest looming bond default from smaller panel maker Baoding Tianwei (Shanghai: 600550). The company has announced that trading of 1.6 billion yuan ($260 million) worth of its bonds has been halted on the Shanghai Stock Exchange. (English article; company announcement) Tianwei has lost big money for the last 2 years, so it’s not a huge surprise that it might not be able to repay its debt. The bigger surprise is that it might be allowed to default on the bonds, since Beijing or local governments often come to the rescue of companies that risk debt defaults.

We saw something similar happen earlier this month when Chaori Solar (Shenzhen: 002506), another smaller player, failed to make an interest payment for some of its bonds, becoming the first corporate bond default in modern Chinese history. (previous post) This latest case involving Tianwei shows that Beijing is preparing to allow more such defaults on solar debt. That should ultimately force many of these smaller players to either shut down or sell their operations to larger players like Canadian Solar (Nasdaq: CSIQ) and Trina (NYSE: TSL), which are emerging as industry consolidators.

Bottom line: Europe’s latest solar settlement with Beijing will end their trade dispute in an amicable way, while a new looming bond default by Tianwei reflects China’s ongoing resolve to consolidate the sector.

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

March 25, 2014

AMSC Consolidates US Wind Operations To Focus on Europe

Meg Cichon

AMSC (NASD:AMSC) will shutter its manufacturing facility in Middleton, Wisconsin by the end of 2014, but hopes to fold its product development operations and employees that are willing to relocate into its headquarters in Devens, Massachusetts, which recently underwent a workforce reduction.

While it consolidates its U.S. workforce, AMSC plans to open a new wind turbine controls manufacturing facility in Timisoara, Romania in 2014, which will serve all of its clients outside of China. Its Chinese facility will continue to cater solely to China customers. With this move, AMSC corporate communications manager Kerry Farrell said it has better access to reach its “target market" of Eastern Europe and allows it to be closer to its Austria facility. According to the REW 2014 wind outlook, there is much promise in emerging northern and eastern Europe despite overarching policy uncertainty.

“By expanding our manufacturing footprint into Eastern Europe, we are enhancing our distribution capabilities and our global reach in a region that is a target market for our wind and grid products," explained AMSC CEO Daniel P. McGhan. "Romania is a European Union member state and cost-efficient manufacturing location with a highly skilled workforce and reliable infrastructure.”

Overall, AMSC said these changes will reduce its workforce 5-10 percent from its 330 total employees as of March 2013. The transition process will cost the company anywhere between $4-6 million by the end of 2014. However, it expects these changes to ultimately save the company $3 million annually, and to be cashflow positive by its fourth fiscal quarter, said Farrell.

Meanwhile, AMSC continues to struggle in court with wind turbine manufacturer Sinovel after it accused the Chinese company of stealing its intellectual property in 2011. AMSC has filed four separate lawsuits and is seeking more than $1.2 billion in damages against what used to be its largest customer. According to Bloomberg, China Supreme Court recently ruled in favor of AMSC in two of its suits, and the cases will be heard in court, rather than being moved to arbitration at Sinovel’s request. Despite the litigation, AMSC continues to focus on product development.

"Key to our growth strategy is product development and the development of system solutions...[yesterday’s] action will help to ensure that we are in the best position to deliver these products to market," said McGhan. "The strategic initiatives we are announcing today mark the beginning of a new chapter for AMSC as we focus more intently on manufacturing and product development across all lines of our business.”

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

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

March 24, 2014

The Pros' Clean Energy Picks: Solar Dominates, Emerging Markets Drag

Tom Konrad CFA

Disclosure: I am long ACCEL, SBS, MIXT, ANGRF, EBODF and HASI. I have sold puts on FSLR (a net long position.)

In December, I asked my panel of professional green money managers for their top three stock picks for 2014.  You can find the full list and descriptions of the companies here.

Three months have passed since I asked them for their picks, and given the popularity of my regular updates on my own 10 clean energy picks for 2014, I decided to ask them what to tell us what they thought of the performance of their picks (shown in the chart below:)

14 Pros Q1.png 3 month total return for the picks from my panel of professional green money mangers. The blue “Avg” bars are for each manager’s three picks, while the red/brown “Fund” bars show the returns of the publicly traded mutual funds or ETFs they manage, if any. Robert Wilder (PBW) is also on my panel, but as an indexer, he does not pick stocks.

Individual Stocks

Here is what each manager had to say about their picks, in the order they got back to me:

Shawn Kravetz

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

“Solar stocks have enjoyed a sensational start to 2014, reminiscent of 2013. We expect more bumps than in 2013, with both long positions and short positions offering opportunity.

Meyer Burger (Swiss:MBTN) is up a whopping 50% year-to-date as investors have suddenly embraced the emerging turn in the equipment cycle that we have been discussing for several months.  We have sold our holdings of this stock.

Hannon Amstrong (NYSE:HASI) is up a bit in 2014, after digesting strong returns in Q4 2013. Their solid dividend and business performance in Q4 set the stage for what should be a solid year in 2014 as they continue to execute and grow their dividend.

Renewable Energy Trade Board (OTC:EBODF) is also up a bit in 2014, after digesting strong returns in 2013. I believe it is like a jet burning off a bit of fuel before climbing higher. Its core holding United Photovoltaics Group Ltd. (formerly known as Goldpoly) just announced a partnership for crowd-funding solar projects. EBODF is a partner in this venture. This appears to be an outstanding business opportunity and it further reinforces EBODF’s standing in high potential ventures poised to add substantial incremental value for shareholders. This remains the quirkiest and yet most compelling opportunity we have seen in our decade investing in solar. With asset value ($22) nearly 4 times the current ($6.50) stock price and emerging business ventures starting to gain traction, I would not be surprised if EBODF were our largest winner in the remainder of 2014.”

Garvin Jabusch

Garvin Jabusch is cofounder and chief investment officer of Green Alpha® Advisors, and is co-manager of the Shelton Green Alpha Fund (NEXTX), and the Sierra Club Green Alpha Portfolio.  He says,

First Solar (NASD:FSLR) – up 2.69% YTD through 3/7/14 – First Solar has had a volatile year, swinging down on a Goldman downgrade, back up on project news, and most recently down on what some felt was a disappointing earnings report (on February 25th). For me, the bottom lines are that FSLR continues to lead the solar industry by providing panels at a manufacturing cost of $0.48 per watt of generation capacity, with plans to and a track record showing ability to decrease costs further, potentially rapidly (e.g. their thin film tech is gaining conversion efficiency faster than silicon PV tech is). This has and will continue to make FSLR the go-to for utility-scale projects both in the US and abroad. The shares will continue to be volatile, and demand and pipeline visibility will vary, but overall, FSLR will grow in proportion to the economy’s growing use of solar both for new electricity demand and to replace coal and other fossil fuel based generation.

Solar City (NASD:SCTY) – up 36.92% YTD through 3/7/14 – After last year’s outrageous run, some folks thought I was crazy to keep SCTY in portfolios for 2014. But this is simply one of my favorite stories. SolarCity buys the least expensive quality panels they can, installs them on home and commercial properties, signs a 20-year lease or maybe a PPA with a business or other enterprise like a utility, and collects revenues for decades with little further capex. The only thing limiting SCTY’s growth potential is in raising enough capital to grow as rapidly as they’d like, but we’ve so far seen them come up with some very creative and relatively inexpensive ways to do that. To those who object that SCTY is still negative EPS, I say that every penny they spend growing now represents essentially unlimited recurring revenue in the future, and that if they wanted to be positive EPS today, they easily could, simply by slowing growth to less than current revenues. So, it’s not like they’re negative EPS because they’re failing. On the contrary, rapid growth now is the obvious move while the industry is still in its infancy.

Digi International (NASD:DGII) – down 17.49% YTD through 3/7/14 – Obviously a disappointment so far this year, DGII missed on both revenue and EPS for Q4 (Q1 in DGII’s world), and guided lower for 2014 in their report of Jan 23. Digi International works in the mobile Internet and machine-to-machine Internet space, by all accounts and anecdotal visibility one of the the fastest growing pieces of telcom and IT and even commerce. I picked DGII because it is profitable and showing good growth (even with the revised, lower numbers), it has no debt, its products have a good reputation and it was (and still is) trading below book value. Moreover, as DGII is a smaller firm (mkt cap $256mm), I liked the potential for rapid growth or even possible takeover. It is unfortunate that the company has not been able to grow revs or earnings as fast as I had hoped, but I think the long term prospects are still in place, and the recent decline therefore represents a more attractive entry point.”

Rafael Coven

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)   Coven’s three picks are MiX Telematics (NASD:MIXT), Opus Group (Stockholm:OPUS), and Control4 (NASD:CTRL).  Due to some extensive back and forth in my initial request for picks, I originally included Trimble Navigation (NASD:TRMB) and Kurita Water (JP:6370, OTC:KTWIF) which I kept in the list because they conveniently brought the total picks up to a nice fourteen for the year 2014.

MiX Telematics (NASD:MIXT)

Coven thinks the main thing keeping MiX’s stock back is that currently emerging markets are greatly out of favor, including MiX’s home base, South Africa. Despite this, company’s fundamentals are good, and the company should benefit from its aggressive global expansion but particularly in fast-growing Africa, where the company is well established and faces little competition.

This is an orphan stock – mostly unknown outside South Africa, with a small float, It only recently listed in the US and has little analyst coverage other than from the banks that underwrote the offering. What it needs is a few more big contract wins and to keep meeting earnings estimates.” He expects most surprises to be on the upside, given management’s conservative projections.

The main risk he sees is that the company is trying to expand rapidly in a variety of markets Brazil, the US, Gulf Region, and Europe simultaneously. Its Software-as-a-Service model allows it to expand into new areas with relatively little capital, but it could still prove to be a strain on management resources.

Even without an upside surprise, Coven expects the company to grow earnings at 15% to 25% for at least the next five years.

Trimble Navigation (NASD:TRMB)

Trimble has been going from strength to strength this year, with new products, strategic acquisitions, and growing cash flow, and this has been reflected in the stock price up over 20% in last 3 months and 700% over 5 years. It’s not a cheap stock, but I think it’s a quality company that will continue to reward long-term investors. I think that there are a lot of strategic acquisitions to be had and that we’ll likely see a dividend established within the next 12-24 months, too. Over the longer term, the company should continue to grow at 12% to 15% annually.

Kurita Water (JP:6370, OTC:KTWIF):

Kurita was a potential turnaround play which Coven had not initially intended to put in his top three, and he has since cooled on it further.  He says,

I thought that this stock was only attractive as turnaround play, stock was up about 10%, but as long as Japan is mired in its economic malaise, I don’t think there’s more to Kurita than the 2% yield and to pray for a pick up in Japan’s economy. Kurita certainly hasn’t been able to capitalize on booming Asian markets for clean water – or at least sufficiently so to offset its heavy exposure to the Japanese market.

Opus Group (Stockholm:OPUS)

He has also cooled somewhat on Opus Group, but still thinks it’s a good long term pick.

Opus was up 20% within a month of selection: a trader should take his profits, but an investor is better holding on to Opus. While I don’t expect a repeat of 2013 when Opus stock rose 50%, I think it it’s going to steadily year after year by taking share from weaker competitors and realizing cost savings from the recent merger. Opus has the best, most experienced management in the business who has a significant equity stake.

From a macro viewpoint, Opus also benefits from overall market growth as governments increasingly outsource non-core services, emissions regulations are increasingly enforced as the growth in the vehicle fleets in developing nations goes hand-in-hand with higher pollutions levels. It’s a major drag on their economies and I don’t see gasoline or diesel engines going away anytime soon. We may also see more on-board diagnostics and emissions testing of off-road vehicles and power boats which would be great given their disproportionately high emissions levels. Long term, I think Opus will be acquired by an industry heavyweight like SGS SA (Swiss:SGS) or a company like Veolia (NYSE:VE). The inspection and certification business is very attractive to a lot of players, and the Europeans tend to dominate it.

Jan Schalkwijk

Jan Schalkwijk CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.  I co-manage his JPS Green Economy Fund.

Alter NRG Corp (TSX:NRG, OTC:ANGRF) So far, I am pleased with the 2014 performance of AlterNRG. True to its character as a volatile stock, it has a beta of 3.17, but the good news is that it is up 21% in 2014. The company recently reached a $15 million equipment & services agreement with BGE Limited, who is developing a large scale Waste to Energy project in China. If executed on time, the company would meet its stated goal of turning cash flow positive in 2014.

Accell Group NV  (Amsterdam:ACCEL, OTC:ACGPF) So far this year Accell Group has not disappointed with a 12% return, of which 3% came from euro appreciation. E-bikes continue to be the high growth product line, though it is mostly concentrated in Northern Europe. For those hoping for an explosion of e-bikes in the US, I would not hold my breath. I believe biking is still mostly an athletic pursuit in our country, even for those who ride their bike to work, judging by the speed of riding and the tight clothing I witness during my Portland morning commute. E-bikes are inherently less athletic and require a different ridership, which is not yet present in significant numbers. Luckily, Accell has enough going for it absent US e-bikers.

Companhia de Saneamento Basico do Estado de Sao Paolo (NYSE:SBS) Down 18% year-to-date, owning SBS has been somewhat frustrating. About 8% of that decline can be chalked up to the fact that Brazilian stocks as group are in the red. It’s P/E ratio is half of that of its peers at 6.9x and its ROE is 50% higher than its peers at 17.6%. A positive news flow with regards to its rate case would be a much welcomed tail wind for SBS. Expect some news on that front in the next month or two.”

My Thoughts

Part of the reason I go through the exercise of asking my panel for their stock picks is probably the same reason you’re reading this article: They are a great source of investing ideas.

Not all great ideas are equal, however.  Also, as Coven pointed out in his comments about Meyer Berger, timing of both buying and selling can be very important.  I like to buy stocks when they’ve taken a hit due to market sentiment or short term results that don’t detract from the long term story.

Kravetz clearly thinks his 100% gains in Meyer Burger are enough, and has sold his fund’s holdings.  Readers should take that as a signal that it’s too late to get in on this ride.  Readers who did get in should probably take profits as well.  Hopefully some of you also took profits in Opus Group at €14.60, as Coven says he would have done.  (Coven’s Cleantech Index and the ETF tracker PZD would not have sold, since he only updates the index on a quarterly basis.) Although Coven says he would have sold, I’m keeping it in the portfolio because he also says he would have re-bought after a dip.

I’m currently increasing my positions in SBS and MIXT, both of which are down from their highs because of the market’s increasing nervousness about emerging market stocks.  As Coven notes, this nervousness is misplaced with regard to MIXT, since the company has truly global revenues and a dropping South African Rand lowers the company’s expenses more than it hurts its sales.

As a Brazilian water utility, SBS is truly an emerging market stock, but its low price to earnings ratio (6.4) shows that a lot of emerging market risk is well priced in.

I don’t yet own DGII, but because of Jabusch’s comments, I plan to give it another look.

This article was first published on the author's Forbes.com blog, Green Stocks on March 13th.

March 23, 2014

As KiOR Stumbles, Aemetis Soars: What Made The Difference?

Jim Lane

Is it just coincidence that KiOR’s stock is down sharply as Aemetis has been on a tear? 
Just a lucky break for ethanol based on attractive “crush spreads”? Or something important about the strategy and how it has played out?

On a clear morning last October at ABLCNext in San Francisco, two companies joined us on stage to discuss their technologies, and their pathway to commercialization.

They had a lot in common.

Both companies produce advanced biofuels for the American domestic market. Both utilize advanced technologies deployed at commercial-scale in the past 24 months. Both are publicly-traded stocks. Both were founded in 2006-07, after the Energy Policy Act of 2005, but before the Energy Independence and Security Act was signed in December 2007.

Both at one time numbered Vinod Khosla among their shareholders (one also had Bill Gates, while the other had Sir Richard Branson). Both have intelligent, highly-educated, passionate and driven people.

Just this week, one of those companies, KiOR (KIOR), announced a $347 million annual loss and related a series of challenges in their technology and financing that led it to declare “substantial doubts about our ability to continue as a going concern.”

The other, Aemetis, (AMTX) announced record quarterly and annual gross profit, record operating income and adjusted EBITDA (including $54.2 million in Q4 revenues and $11.3 million in gross profit), and 54 million gallons of production.

What made the difference?

In our 10-part series The Bioenergy Project of the Future, published in late 2010, our interviews led us to conclude that the winning strategy was likely to be about using, as Aemetis CEO Eric McAfee once outlined it to The Digest, “first generation assets and positive cash flow as a basis to adopt advanced fuel and chemical technology, lowering risk while building an operations team, revenues and cash flow.”

Since then, there have been an big number of new advanced biofuels technologies coming to scale: INEOS Bio, KiOR, Beta Renewables, Amyris (AMRS), Aemetis, BioProcess Algae, Dynamic Fuels, Neste Oil (NEF.F), Diamond Green Diesel and Gevo (GEVO) to name a few — with POET, Abengoa (ABGB), GranBio, Raizen, and DuPont (DD) ready to join the list in upcoming months. REG (REGI) has been producing advanced biofuels at scale all along, and has expanded remarkably.

None have followed the Bioenergy Project of the Future playbook exactly — and some of them have bypassed the script altogether and chosen a different strategy as a path to commercial success, and we’ve wished them all well, as we always do here in Digestville.

But at this juncture, they are worth repeating, the first five steps.

Five steps to success from the Bioenergy project of the Future

Step number one: Buy an existing ethanol or biodiesel plant, or equivalent. Why? We learned that projects “not only have to demonstrate technological prowess in bioprocessing, we have to demonstrate financial and management acumen to all our stakeholders – the community, policymakers, lenders, and customers. As well as to begin to establish that eco-system of relationships in our community that will serve us later on, when we add-on riskier and more advanced second-generation features.”

Step number two: a graduated series of bolt-ons, beginning with the collection of cellulosic (or residue-based, that is to say, lower-cost, non-food) biomass. First, we have to demonstrate that we can build a sustainable ecosystem around the harvest and delivery of biomass.

Step number three: Add renewable chemicals. We heard that “If we have learned anything from the stories of hot companies like Amyris, Gevo, Solazyme (SZYM), or Cobalt Technologies, as well as exciting pure-plays like Genomatica, Heliae, Verdezyne, Segetis, Elevance, or Rivertop Renewables, it is the importance of producing chemicals or other bio-based materials first to generate revenues, before taking the company further down the cost curve and up in scale in order to make competitively-priced renewable fuels.”

Step number four: Add renewable fuels. No longer are we producing advanced biofuels “because we can”, as a demonstration of technology. We are demonstrating the power of our network of relationships in the community, and the power of our growing balance sheet. Now that capacity expands and we begin to saturate some of the market we developed in high-value organic acids, we turn to the fuel market with a capacity expansion effort.

Step number five: add algae. ”Monetize the CO2,” we heard. By adding technologies that will help create renewable fuels from the CO2 we are producing as a byproduct, adding economic strength as well as reducing our carbon footprint.

Looking at Aemetis’ run of success

The strategy of the company has generally been clear for years – which is generally summarized in Step One of the “five steps to success”: buy an existing ethanol or biodiesel plant (or, own one already), and begin to aggressively bolt-on technologies that improve the financials of the business.

We’ve seen a number of companies go that route. Amyris, Gevo, Raizen, POET, Green Plains (GPRE), and REG among them, in addition to Aemetis. Some investors may feel that the “Add ingredients slowly and stir” part was to an extent overlooked at Amyris, KiOR, and Gevo — certainly, the pressure to keep up a very high pace towards commercialization is something that all VC-backed firms feel.

Virtually all ethanol plants have been bolting on and improving. Water efficiency, energy efficiency, corn oil extraction, and so on. Some more boldly than others. Diversification of feedstock has been a hallmark of REG’s successful strategy in biodiesel — but we hear less about it in the ethanol business.

“Our fourth quarter 2013 results reflect a year of record financial performance and significant progress for Aemetis,” said McAfee in a statement accompanying the results. “During 2013, we diversified our feedstock. After retrofitting and restarting our plant in May 2013, we processed about 84 million pounds (42,000 tons) of grain sorghum; became the first US ethanol plant approved by the EPA to produce lower-carbon, higher-value Advanced Biofuels (and to receive D5 RINs) using sorghum/biogas/CHP; and upgraded our India plant by constructing and commissioning a biodiesel distillation unit. These efforts translated into record levels of revenue from our India operations, and company-wide records for operating income and Adjusted EBITDA,” he added.

The company certainly benefited from the relatively high “crush” spread between energy and feedstock prices — but also, Aemetis put itself in a position to earn D5 RINs and utilize diversified feedstock. As Jack Nicklaus once observed, “If I played well and prepared myself properly, then all I had to do was control myself and put myself in a position to win.”

But we’re struck by the way that the Aemetis run adhered to the playbook based on all those interviews with industry back in 2010. Buy an ethanol plant. Add cellulosic feedstock. Think fuels, but also think chemicals and other high-value and high-demand markets (such as jet fuel). Think about monetizing CO2 via algae. Those were ideas that were — four years ago, everywhere, on everyone’s mind.

It is reminiscent of something else right out of the Jack Nicklaus playbook: “Don’t be too proud to take lessons. I’m not.”

The steps to success: who employs what, and how

In the case of step two, most companies skipped it — either working with traditional feedstocks or counting on other companies to successfully shepherd the aggregation of biomass. Gevo and Amyris have continued to work with traditional corn and cane as feedstocks. Valero partnered with Darling (DAR). But others have developed aggregation systems and direct relationships with growers: KiOR, Beta Renewables, POET, DuPont and Abengoa among them. Raizen and GranBio are working with bagasse, already aggregated at ethanol plants in Brazil. Most of them will tell you they learned a lot from the process.

In the case of step three and step four, the decision to produce chemicals first and fuels later has been a choice embraced only by a few, primarily Gevo and Amyris amongst those who have reached scale. Solazyme will join them when their plant opens in Brazil. Most — like Dynamic Fuels, Neste Oil, REG, POET, DuPont and Abengoa — have opted for the fuels market. In part that is because of the role of RINs in the marketplace, the renewable fuels credits that add value to the fuels side (and are valueless for chemical off-takers). That’s part of the design of the Renewable Fuels Standard — not only to incentivize obligated parties to buy advanced alternative fuels, but to ensure that producers have a financial incentive in the nearer-term to make $3 fuels when there are $5 chemicals to be made.

In the case of step five, the decision to embrace algae as a pathway to monetizing the CO2 that vents from a first-generation ethanol plant — well, Green Plains is well advanced down that pathway in its BioProcessAlgae JV.

Why companies struggle

As I outlined in a private note to readers two months ago, why sector executives tell The Digest is that “it comes down to knowledge, and how you use it, adding that “if you have real dialogue by the real leaders about the real issues, the best technologies and companies will be able to gain the knowledge and competitive edge they need. And I believe…that no company can succeed without industry-leading knowledge in every aspect of its operations.”

But we’ll add one more factor we hear about. Time. It’s very tempting, in the digital age, to want new manufacturing technologies to proceed to scale and commercial success in very short time frames — to meet corporate hurdle rates or expected rates of return from investment in venture funds. It’s a competitive market for capital, after all, and companies with elevated risks require the potential for elevated returns in order to attract capital at all.

The Bottom Line

Let’s keep the results of one quarter or year in perspective — in the months ahead, the technology of KiOR is expected by its owners to reach steady-state operations and its fortunes would then revive in the financing markets.

And, the economics of sorghum and biogas, or the RIN values for advanced biofuels, may not prove as attractive in the coming months as they have in the past several, for Aemetis.

But in 2010, when we spoke to executives about the Bioenergy Project of the Future, we did hear a drumbeat of interest in the model based on building “first generation assets and positive cash flow as a basis to adopt advanced fuel and chemical technology, lowering risk while building an operations team, revenues and cash flow.”

It’s been a long-run for Aemetis and KiOR, both — and their stories are still in incomplete form.

But it’s clear enough to us here in Digestville that there’s not much we’re seeing now that we didn’t hear about back in 2010. As Socrates once remarked of The Republic, the ideal city-state, “it exists in the heavens, like a constellation, as a pattern for those able to see it. And seeing, they can found a Republic in themselves.”

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

March 21, 2014

Will Outsized Solar Stock Returns Continue?

By Harris Roen

Any way you slice it, solar investing has been on a tear for the last year. Of the 69 solar stocks that the Roen Financial Report tracks, three quarters are up for the year. On average solar stocks have gained 85% for the year, with 60% of solar companies up in the double digits. What is most impressive is that the top 17 solar stocks are all up in the triple digits, and one, Canadian Solar Inc. (CSIQ), is up 903%!

This article will look at who these outsized performers are, what is going on with them, and where this highflying sector may go from here.


Top Solar Companies

Ticker Company Market Cap Location Product/Service
ALTI Altair Nanotechnologies, Inc. micro Reno, NV Energy storage


Amtech Systems, Inc. micro Tempe, AZ Semiconductor manufacturing equipment


Canadian Solar Inc. small Canada Solar cells and modules
CSUN China Sunergy Co., Ltd. micro China Crystalline silicon solar cell and modules
DQ Daqo New Energy Corp. micro China Raw polysilicon, silicon cells and PV modules


First Solar, Inc. small Tempe, AZ Thin-cell PV cells and modules
GTAT GT Advanced Technologies Inc. micro Merrimack, NH Equipment used by solar and LED manufacturers
HSOL Solarfun Power Holdings Co. micro China Vertically integrated, raw materials to finished product
JASO JA Solar Holdings Co., Ltd. small China Solar cells, modules and panels
JKS JinkoSolar Holding Co., Ltd. micro China Solar wafers, cells and modules
RGSE Real Goods Solar, Inc. micro Louisville, CO Solar installation
SCTY SolarCity Corp. micro San Mateo, CA Design, installation, financing of residential and commercial solar


ReneSola Ltd. small China PV manufacturer
SPWR SunPower Corp. small San Jose, CA PV manufacture and instillation
SUNE Sunedison Inc. small St. Peters, MO Vertically integrated PV manufacturer; project developer


Trina Solar Ltd. small China Solar cells and modules
YGE Yingli Green Energy Hold. Co. small China Integrated solar company

The top returning solar companies, listed above, perform a variety of products and services in the solar sector. Overall they are small companies as measured by market capitalization, and are all either U.S. or Chinese companies (even though CSIQ is headquartered in Canada, virtually all of its operations are in China). Returns for these top solar stocks are outstanding, averaging 302% for the past year.

Top Solar Stock Technicals and Fundamentals

What caused these stocks to shoot up over since the beginning of 2013? Part of the story is their stock prices were overly depressed in 2012. Solar stocks experienced a very strong downdraft due to large losses incurred earlier in the decade. As is typical in the stock market investors overshot, so many of these stocks are recovering from exaggerated lows.

top_solar_ROE_20140317.jpg Technical charting is one thing, but it is more instructive to look at some of the fundamentals. The graph above shows the average return on equity (ROE) for all 17 top solar stocks. ROE is a multiple that reflects how efficiently a company uses its resources to turn a profit. The numbers were dismal from 2009 through 2012, but improved markedly in 2013, led by companies like Real Goods and Trina. The column in 2014 shows ROE for the past 12 months of reported data, so it can be seen that the ROE has weakened. (Because of the wild ROE fluctuation for ReneSola, data for this company was removed for the purposes of this chart.)


top_solar_debt_20140317.jpg Debt can also be a useful measure to view how companies in a sector are faring. Debt in and of itself is not a bad thing, it is how debt is deployed that matters.

The chart above graphs two measures of debt. The blue line shows a ratio of total liabilities to total assets, which has been continually trending up. (It is interesting to note that the two smallest ratios belong to FSLR and ASYS, American companies, and the two highest, YGE and CSUN, are Chinese.) Though banks (or government in the case of China) seem willing to continue to loan to these companies, a continuing of this up trend would make me cautious.

The black line, long-term debt to total sales, is presenting a nice downtrend. This improvement is due to increasing sales for these companies. There has been a slight uptick in the most recent measure of long-term debt to total sales, so caution is advised here as well.

Average sales for these top solar stocks show a similar story. The figure above charts the average percentage change in sales from the previous quarter for the top solar companies. It is clear that sales improved markedly at the end of 2012 and beginning of 2013. Sales are still growing, but have diminished somewhat from earlier growth levels.

Where Do These Top Solar Stocks go From Here?

Considering the charts above, it is likely that these top solar stocks will back off on some of their outsized gains. Though there may be some pull back at the top level, I think the long-term trend is still up.

The last chart shows the Ardour Solar Energy IndexSM (SOLRX), illustrating that solar stocks are still way below the heady days of 2007-2008. In fact, despite the recent large gains in solar specifically, and alternative energy companies in general, solar stocks are only trading at levels they were at two and a half years ago. Though it may take decades for solar stocks to get back to the highs of 2008, and some may never get there at all, there is still plenty of room for price recovery.

In sum, the enormous gains in solar in the past year will be hard to maintain, so we expect there to be some pullback from here. Having said that, there is still much room for growth in this sector, owing to attractively low overall install costs, high levels of public interest, and continued incentives. Though a 20+% correction in this sector would not surprise me, I would take it as a good buying opportunity.


Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of SUNE, 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.

March 20, 2014

Atlantic Power: Not So Clean

Tom Konrad CFA

Disclosure: Long MCQPF

A reader recently said he thought “that the majority of [Atlantic Power Corporation's (NYSE:AT)] portfolio is in wind power.”

Actually, it’s not even close.  While Atlantic Power’s website says “95% of our power is ‘clean power’.”  By “clean” they mean “not coal.”  They are also indulging in a bit of fudging by counting the size of projects by megawatts (MW) of capacity, which has the effect of decreasing the apparent weight of baseload power generation like coal.

AP Adj EBITDA by Project.png

Page 30 of their annual earnings presentation gives a much clearer picture of the their assets, since it breaks out the projects by cash flow (adjusted EBITDA.)  Only 21% of Atlantic Power’s 2013 Adjusted EBITDA came from wind.

The following is Alantic Power’s graph of Adjusted EBITDA by project from the earnings presentation.  I’ve added notations to each wedge to identify the project fuel by cross referencing it with their project list:

As you can see, coal accounts for 8% of Adjusted EBITDA (not 5%.)  It’s not clear how much of the “Other” wedge is natural gas, but if we break out those “other” projects by MW capacity, they are about three quarters natural gas.  Of the 76% of cash flow which is broken out by project, 29% is natural gas, 18% is wind, 12% is hydropower, 9% is biomass, and 8% is coal.

The natural gas industry certainly likes to call itself as “clean.”  I’m willing to concede that it’s not as bad as coal.  I even consider it clean when it’s used in a Combined Heat and Power (Cogeneration) project, as is the case with Capstone Infrastructure’s (TSX:CSE, OTC:MCQPF) natural gas fleet.

Here are some comparable charts from Capstone’s investor fact sheet:
Capstone breakdown.png

Note that Capstone takes the trouble to break out its Adjusted EBITDA by fuel source.  A big chunk of cash flow comes from its water utility, but of the rest, only the 4% slice from district heating does not meet my definition of “clean”.  The rest is cogeneration (17%), wind (13%), solar (13%), hydropower (8%), and biomass (6%.)  It’s also worth noting that a larger chuck of cash flow has come from renewable power since Capstone acquired Renewable Energy Developers in 2013.  I’m sure Capstone’s management will highlight that in their 2013 earnings presentation today.  UPDATE: Here is the 2013 chart:

Capstone 2013 Adjusted EBITDA.png

If a power producer claims to be “clean” and does not prominently break out its electricity production, revenue, cash flow, or earnings by fuel source, they’re probably talking about natural gas or nuclear power.   Some people consider these clean, but I suspect even Atlantic Power’s management has doubts.

If management really thinks natural gas is clean, why did I have to dig to find out how Atlantic Power fuels most of its generation?

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

March 19, 2014

Can KiOR Continue As A Going Concern?

Jim Lane

KiOR LogoDelayed 2013 results includes going concern statement. Future Khosla financing contingent on milestones. Default looms as soon as April. Financing after August unclear.

In Texas, KiOR (KIOR) announced a $347.5M net loss for 2013, and issued a “going concern” statement that focused on its ability to raise future capital to sustain operations and build its next plant.

In a 10-K filing with the SEC made today, the company said that “Currently, we have ceased work on a series of optimization projects and upgrades at the Columbus facility and are bringing the facility to an idle state,” and warned:

“If we are unsuccessful in finalizing definitive documentation with Mr. Khosla on or before April 1, 2014, we will not have adequate liquidity …This will likely cause us to default under our existing debt and we could be forced to seek relief under the U.S. Bankruptcy Code.”

Excerpts from the KiOR 10-K are provided below. The complete statement is available here.

Excerpts from the KiOR statement

We have substantial doubts about our ability to continue as a going concern. To continue as a going concern, we must secure additional capital to provide us with additional liquidity. Other than the Commitment from Mr. Khosla to invest in us a cash amount of up to an aggregate of $25,000,000 in available funds in a number of monthly borrowings of no more than $5,000,000 per month, we have no other near-term sources of financing.

Because the Commitment is subject to the negotiation and execution of definitive financing documents and the achievement of performance milestones, we cannot be certain as to the ultimate timing or terms of this investment.

If we are unsuccessful in finalizing definitive documentation with Mr. Khosla on or before April 1, 2014, we will not have adequate liquidity to fund our operations and meet our obligations (including our debt payment obligations) and we do not expect other sources of financing to be available to us. This will likely cause us to default under our existing debt and we could be forced to seek relief under the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy may be filed against us). In addition, any new financing will require the consent of our existing debt holders and may require the restructuring of our existing debt.

If we successfully achieve our performance milestones that allow us to receive the full Commitment in the near term, we expect to be able to fund our operations and meet our obligations until August 31, 2014, but will need to raise additional funds to continue our operations beyond that date.

During the first quarter of 2014, we commenced a series of optimization projects and upgrades at our Columbus facility. The optimization projects and upgrades are targeted at improving throughput, yield and overall process efficiency and reliability. In terms of throughput, we have experienced issues with structural design bottlenecks and reliability that have limited the amount of wood that we can introduce to our BFCC system. These issues have caused the Columbus facility to run significantly below its nameplate capacity for biomass of 500 bone dry tons per day and limited our ability to produce cellulosic gasoline and diesel.

We have identified and intend to implement changes to the BFCC, hydrotreater and wood yard that we believe will alleviate these issues. In terms of yield, we have identified additional enhancements that we believe will improve the overall yield of transportation fuels from each ton of biomass from the Columbus facility, which has been lower than expected due to a delay introducing our new generation of catalyst to the facility and mechanical failures impeding desired chemical reactions in the BFCC reactor.

In terms of overall process efficiency and reliability, we have previously generated products with an unfavorable mix that includes higher percentages of fuel oil and off specification product. Products with higher percentages of fuel oil result in lower product and RIN revenue and higher overall costs. We have identified and intend to implement changes that we believe will further optimize our processes and increase reliability and on-stream percentage throughout our Columbus facility.

We are also aiming to make reductions to our cost structure by, among other things, decreasing natural gas consumption by the facility. While we have completed some of these projects and upgrades, we have elected to suspend further optimization work and bring the Columbus facility to a safe, idle state, which we believe will enable us to restart the facility upon the achievement of additional research and development milestones, financing and completion of the optimization work. We do not expect to complete these optimization projects until we achieve additional research and development milestones and receive additional financing.

Subject to our ability to achieve these additional research and development milestones, our ability to raise capital, our ability to successfully complete our optimization projects and upgrades and the success of these projects and upgrades in improving operations at our Columbus facility, we intend to begin construction of our next commercial production facility, which we do not expect to occur before the second half of 2015 at the earliest. We will also need to raise additional capital to continue our operations, build our next commercial production facility and subsequent facilities, continue the development of our technology and products, commercialize any products resulting from our research and development efforts, and satisfy our debt service obligations.

Currently, we have ceased work on a series of optimization projects and upgrades at the Columbus facility and are bringing the facility to an idle state. These projects were targeted at improving throughput, yield and overall process efficiency and reliability and to address problems we have had to date in the Columbus facility with structural design bottlenecks and reliability issues, operations below nameplate capacity, unfavorable product mix and higher costs due to overall process inefficiencies.

As a result of this cessation of operations, we are unable to estimate 2014 production levels.

Subject to our ability to achieve these additional research and development milestones, our ability to raise capital, our ability to successfully complete our optimization projects and upgrades and the success of these projects and upgrades in improving operations at our Columbus facility, we intend to begin construction of our next commercial production facility, which we do not expect to occur before the second half of 2015 at the earliest. We will also need to raise additional capital to continue our operations, build our next commercial production facility and subsequent facilities, continue the development of our technology and products, commercialize any products resulting from our research and development efforts, and satisfy our debt obligations.

We have generated net losses of $347.5 million, $96.4 million and $64.1 million for the years ended December 31, 2013, 2012 and 2011, respectively, as well as total of $525.5 million of operating losses and an accumulated deficit of $574.3 million from our inception through December 31, 2013. We expect to continue to incur operating losses until we construct our first standard commercial production facility and it is operational.

As discussed above, we have substantial doubts about our ability to continue as a going concern and we must raise capital in one or more external equity and/or debt financings to fund the cash requirements of our ongoing operations. Other than the Commitment from Mr. Khosla, all of our other committed sources of financing are contingent upon, among other things, our raising $400 million from one or more offerings, private placements or other financing transactions, which we do not expect to occur prior to the completion of the optimization projects and upgrades at our Columbus facility.

Analyst reaction

Piper Jaffray’s Mike Ritzenthaler writes:

“We are downgrading shares of KIOR to Neutral (from Overweight) and lowering our price target to $1 (from $3) following the company’s 10-K filing yesterday…additional liquidity in the form of $42.5 million of convertible debt was raised in 4Q13. In our opinion, it no longer seems reasonable that a substantial liquidity infusion outside of expensive ‘just in time’ insider debt is likely over the next 12 months.

“We believe that the pace of the commercial scale-up in 2014 will be too methodical to keep investors interested in the company’s progress. Additionally, rising levels of expensive insider debt will likely be the only material source of funds to compensate for quarterly cash burn, and we see no reason to believe that covenant issues will abate over the coming 12 months (indeed, they will likely intensify as the ‘cash loop’ gets larger). Ultimately, we believe that investor patience will be worn too thin before Columbus is capable of operating at nameplate capacity, absorb all the fixed production costs, and turn a gross profit — allowing the company’s auditors to remove the going concern language from its filings and finally enabling the company to pursue a healthier balance sheet.”

Cowen & Co’s Rob Stone and James Medvedeff write:

“Q4:13 included a $196MM write-down of Columbus and Natchez engineering work; Columbus is expected to remain idle until R&D on improvements is completed (likely six months). A $25MM commitment from Khosla could fund operations through August, but more funding will be needed. We are suspending our rating and price target due to lack of visibility on continued operations and funding sources.”

Raymond James’ Pavel Molchanov writes:

“While we are still fans of the technology platform, we have slim confidence in positive catalysts over the next six to 12 months, and the prospect of equity dilution is also concerning.

“With $25 million of cash at year-end, given the commitment from the company’s largest shareholder, KiOR also needs to raise capital for near-term funding needs. We don’t doubt the company’s ability to raise the funds, but there is no escaping further near-term dilution – which is especially painful given the current market cap. As such, the “going concern” statement included in the 10-K should not come as a major surprise – the auditors required the statement because the company does not have committed financing to cover a full 12 months of costs.

“The good news is that Vinod Khosla, one of Silicon Valley’s wealthiest venture capitalists and the primary shareholder who owns a controlling position in the stock, remains committed to the story. The company has received a $25 million commitment in interim funding from Khosla until additional long-term financing can be secured. This commitment, together with cash on hand, covers expected costs through August.”

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

March 18, 2014

Gevo: Are We There Yet?

by Debra Fiakas CFA

The renewable chemicals and biofuel company Gevo, Inc. (GEVO:  Nasdaq) is scheduled to report fourth quarter 2013 financial results on March 25th.  Analysts have a couple of weeks to prepare questions for management during the earnings conference call.  Top on the list has to be got to be about Gevo’s recent agreement to license its novel isobutanol technology to Porta Hnos of Argentina.  Porta Hnos is a well established ethanol producer so if the license is consummated, it is expected that this partner has the ability to execute on plans to produce isobutanol for the South America market.

Isobutanol is popular as a solvent, but it has a plethora of applications across several industries.  It is used in paint solvents, varnish removers and automobile polish.  Importantly it is a building block for plastic bottles and synthetic textiles.  It even has a use in food production as a flavoring agent.  That all adds up to the kind ‘very large market opportunity” that generates strong sales and profits.

Gevo has already begun production for other markets and the company has several off-take agreements and supply agreements in place, including Sasol Chemical Industries and Land O’Lakes Purina Feed.  The company has also been diligent in putting together development agreements with high profile customers like Coca Cola and the U.S. Army to build the market for its isobutanol made from the fermentation of sorghum, barley wheat or corn.

In December 2013, Gevo announced successful test flights by the U.S. Army with a Black Hawk helicopter fueled up with a 50/50 blend of Gevo’s alcohol-to-jet fuel and conventional jet fuel.  The test was part of the Department of Defense program to get all of its craft certified to operate on alternative fuels.  Gevo already had agreed to supply up to 16,000 gallons to the U.S. Army for test purposes, but has yet to get a long-term supply contract.  Thus another great question for Gevo management is what visibility they have into the DOD’s plans for USING alternative jet fuel.

In the most recently reported twelve months Gevo claimed $8.5 million in total sales, resulting in a net loss of $62.6 million.  This is well below revenue levels in previous periods.  Indeed Gevo has had a fairly erratic track record as its isobutanol sales are still at an early stage and have not yet replaced the sale of ethanol that had previously been produced in the company’s Luverne, Minnesota plant.  The cash burn was nearly as discouraging.  Gevo used $52.5 million in cash in the most recently reported twelve months.

The logic of converting an ethanol plant to isobutanol production is understood.  Unfortunately, while we appreciate the route Gevo has mapped out, the journey seems to be taking some time.  What we really need to understand is “ARE WE THERE YET?”  In December 2013, the company raised about $25 million through the sale of common stock and warrants.  Some of the money will be used to ramp up production at the Luverne plant.

A review of recent trading patterns in GEVO has not been encouraging. Many of the technical formations in recent months point to continued bearish sentiment.  One source of concern for shareholders has been the suppressive effects of the recent common stock issuance on near-term trading.  Shareholders need to know if the pain of dilution is going to be worth it.
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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

March 17, 2014

Toyota's Asset Backed Green Bond: This Is Big

Sean Kidney

Toyota Motor Corp. (NYSE:TM) will close mid-next week on what will be the world’s first green bond backed by auto loans – electric vehicle and hybrid car loans to be specific. And what a kickstart for that market, at $1.75 billion.

According to a report in International Financing Review (IFR), the bond will be in multiple tranches, each at a different ratings level: A2 tranche, A3 and A4 (Moody’s ratings).

First thing to know: they told the media a week ago it would be a US$774.675 million bond. Rumour has it that initial investor interest was up to three times that. On Tuesday IFR was reporting that the bond would be $1.25 billion; by yesterday someone had told Bloomberg that it would be $1.75 billion. That’s looking like a very successful bond.

Was it because it was green? I mean, people are going to buy a Toyota bond anyway, aren’t they? Citigroup (NYSE:C), who structured the bond, certainly felt it was worth the extra effort to pick up new investors; but we won’t know details until after close next Wednesday. By the way, co-lead-managers with Citi are Bank of America Merrill Lynch (NYSE:BAC) and Morgan Stanley (NYSE:MS). BNP Paribas, Credit Agricole, JP Morgan and Mizuho are co-managers.

Most “labelled” green bonds (see our explanation of this in our review of green bonds in 2013) have been “asset-linked” corporate green bonds, where the investor has no exposure to the underlying asset.

This is different; the different tranches of the bond are apparently fully backed by the cash flows of the auto loan portfolio – which is great for Toyota because they get they original lending capital back and can plough it into a new pile of loans, which all helps to sell more low-carbon cars).

Asset-backed securities are still relatively new to the “labelled” green bonds theme: Hannon Armstrong (NYSE:HASI) kicked this off with a $100 million bond in December backed by energy efficiency and renewable energy cash flows. (Mind you do there are a few asset-backed renewable energy bonds around that we include in our broader Bonds and Climate reporting, such as MidAmerican’s Topaz, last year’s groundbreaking rooftop solar lease securitization from SolarCity (NASD:SCTY) as green, and 2010′s Italian Andromeda bond).

The size of Toyota’s bond signals the start of a major new stage in the green theme. We think it’s safe to expect more.
Two reasons why this is important:

1. It establishes transport as green for the purposes of bonds issuance. Yes yes yes!

Transport is responsible for 23% of global energy emissions – reducing those emissions is vital. Of course the question is then what really is green. Are hybrids really green or is true that they have higher emissions than diesel cars if you drive them intercity? What about a Hummer hybrid, is that good (yes there was one)? And don’t we want to get everyone out of cars and on to trains instead?

It just so happens we have a Low-Carbon Transport Working Group of international experts in the area tackling these issues at this very moment; all under the Climate Bonds Standard and Taxonomy. We expect to be publishing agreed criteria for low-emission vehicles later in April, along with criteria for metro rail, bus rapid transit systems and the like.

From what little we know so far, the Toyota bond looks like it will meet the criteria currently being discussed; they’ve said cars will “be required to meet standards of energy efficiency in regulations set by the California Environmental Protection Agency’s Air Resources Board". We’ll know more about exactly what level later next week and whether they’ve had a credible sign off on the green credentials.

2. Asset-backed issuance is incredibly important to getting increased capital into the green investment pipeline.

Being able to issue asset-backed bonds allows banks and companies to sell green loans and assets to the huge pool of investors looking for low-risk bonds and quickly recycle the capital they raise into new investments.

The more easily and quickly they can sell a mature portfolio, the more project investment and lending they can do with a limited amount of capital.
This is a big moment for the green bonds and climate bonds market.

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

March 15, 2014

A Dangerous Game Of Us vs. Us Played With Our Life Savings

Tom Konrad CFA

US law requires that money managers put their clients’ interests first.

Investment advisers and money managers almost universally assume this means that they must try to make as much money for clients as possible. If your job is all about money, this can seem like a natural interpretation. More money is better, right?

For others, equating making money to serving clients’ interests seems like a very narrow view of the world.

If Tracy is saving for retirement, she obviously wants to have enough money to pay for it. She also wants to be healthy enough to enjoy it. If her money manager invests in a company which poisons her drinking water to increase returns for its shareholders (including Tracy), she probably won’t be very happy about it, no matter what the gains in her 401(k). Her adviser’s pursuit of profit has clearly not served her very well.

This scenario may seem far-fetched: What’s the chance that Tracy is directly harmed by a company she owns?

In truth, that scenario is not at all improbable. It happens all the time. Most investors own slices of most large, publicly traded companies. 44% of US households owned mutual funds in 2012. Whenever a large public company harms more than one household through its actions, it’s probably harming a shareholder. Only our hands-off approach to our investments, often through multiple intermediaries like advisers and mutual funds, keeps us from thinking about the harm we’re doing to ourselves.

Some might justify this harm by saying that other shareholders’ gains outweigh the harm to one or two families. But what about climate change? When a company emits greenhouse gasses, it’s harming all its shareholders. And their children.

When it comes to companies polluting, it’s not us vs. them.

It’s a dangerous game of us vs. us. And it’s played with our life savings.

This article was first published on the author's Forbes.com blog, Green Stocks on March 5th.

March 14, 2014

Turning Conventional Battery Tech into Unconventional Profits

by Debra Fiakas CFA

Near the end of February 2014, Highpower International (HPJ:  Nasdaq) announced its first order for large-format lithium ion batteries to use in electric vehicles. Its customer, Huizhou Yipeng Energy Technology will be integrating the batteries into buses destined for the sales outlets of China-based manufacturers.

The boost in sales for Highpower is likely to be meaningful.  Management estimates each bus will use as many as 288 of the company’s 20-ampere-hour battery.  Guidance for annual sales from Huizhou Yipeng alone is in a range of $4 million to $5 million.  In the most recently reported twelve months Highpower claimed $125.2 million in total sales.  That means the orders from Huizhou may boost annual sales by 3% to 4%.

Highpower has been earning a slim profit on its sales of nickel metal hydride and lithium ion battery technologies for motor bikes, power tools, and personal-care devices.  The company has production facilities in Shenzhen and Huizhou, China.  Its recent operating profit margin was 1.2%.  Still over the past for years the company has been successful in converting 3.1% of its sales to operating cash flow.

The ability to generate internal resources is vital for Highpower, which continues to invest heavily in capital projects and product development.  Operating profits are not sufficient for the company’s investment budget.  Thus cash resources continue to be important for Highpower’s strategic plans.  Cash at the end of September 2013, the last time the company reported financial results, was $37.1 million.

The company also has $68.7 million in short- and long-term debt on its balance sheet.  Debt is not the only balance sheet consideration.  Typical of China-based companies, Highpower carries significant accounts receivable and accounts payable on its balance sheet.  Days sales outstanding were 105 days at the end of September.  At least Highpower has managed to maintain good enough relationships with suppliers to leave 148 days of costs in payables outstanding.  Highpower maintains a relatively low inventory at only 62 days of sales.  Thus the company enjoys a favorable financing interval and actually receives 19 days of financial support from suppliers  - a  value near $5.3 million  -  instead of having to dig into cash resources to support working capital needs.

A review of recent trading patterns in HPJ shares suggests the stock has built up enough momentum to rise to the $8.00 price level.  Yet there appears to be some disagreement among investors about the company’s future.  In the final day of trading last week the stock completed the formation of what technical analysts call a ‘high pole warning,’ suggesting that lower prices may be ahead at least in the short term.  We believe this could be trading in HPJ shares illustrate the usual fascination with the strong growth that China offers, but the ever present concern that investors have for the veracity of financial reports from China-based companies.

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

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

March 13, 2014

Nuclear and Solar From Down Under

by Debra Fiakas CFA

Last week the Aussies invaded New York City, bivouacking at a popular hotel and parading a string of Australia-based companies in front of investors.  Of course, there were the usual mining and minerals companies for which resource-rich Australia is so famous.  However, the Australia Stock Exchange  -  one of the event sponsors  -   has diversified with listings in communications, biotechnology and alternative energy.

One of the presenters, Silex Systems, Inc. (SLX:  ASX and SILXY:  OTCQX) is a talented little company with technologies for solar and nuclear power generation.  Silex has developed a laser for uranium enrichment.  The laser alternative presents a lower cost alternative to conventional centrifugal methods.  The company landed a sweet deal with GLE, the joint venture of General Electric and Hitachi, and began receiving payments in fiscal year 2013.  Silex has stepped into the solar industry with concentrating photovoltaic system for electric power utilities.  In June 2013, the company completed construction of Australia’s largest concentrating photovoltaic solar power facility.  Silex is also working on a demonstration concentrating solar power station in Saudi Arabia.

Silex is also dabbling in materials development.  The company is using rare earths for semiconductor substrates.  Applications are diverse:  photonics, solar and electronics.  A fourth revenue source is ChronoLogic, a producer of test and measurement products in which the Silex has a 90% interest.

In the fiscal year ending June 2013, Silex reported a profit of AU$850,544 on AU$23.7 million.  Milestone payments from GLE for laser enrichment technology tipped continuing operations into the black from a deep loss in the previous fiscal year.

Silex is recording revenue, but still has the character of a developmental stage company.  Its financial reports are noisy with events as the Silex moves ahead with construction projects and meets milestones in customer relationships.  While financial results are choppy, there appear to a number of anticipated events ahead that will serve as catalysts for the stock price.  The company expects to begin construction of another concentrating solar power facility in late 2014 and its GLE customer is expected to begin negotiations with the U.S. Department of Energy for enrichment of uranium tailings sometime in 2014.  What is more, Silex is able to bandy about the buzz words that get investors’ attention:  rare earths, alternative energy.

Investors have a choice between the Silex Systems listing on the ASX or the Over-the-Counter quotation of an ADR in the U.S.  The stock is trade in both case near 52-week lows.  The ADR trades infrequently and the Australia exchange sees only a little more activity.  Thus it seems to me the stock is best suited for a buy-and-hold strategy and makes sense only for those investors with thick enough skins to tolerate some price volatility.    

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.  SUNE is included in the Solar Group of Crystal Equity Research’s The Atomics Index, composed of companies using the atom to create alternative energy sources.

March 12, 2014

How Geothermal Heat Pumps Can Soar Like Solar

Tom Konrad CFA

Geothermal Heat Pumps (GHP) are a niche market.  They shouldn’t be.

Disclosure: Long WFIFF, short LXU puts (a net long position.)

A Better Mousetrap?

Ralph Waldo Emerson never said “Build a better mousetrap, and the world will beat a path to your door.”  The mousetrap that likely inspired the misquote was invented seven years after his death.  Unfortunately, many people take it literally.  GHPs have all the hallmarks of a better mousetrap: They do the job of heating and cooling a building more efficiently than any other option.  Despite the larger up-front cost, they are a mature technology and usually the most economic option for buildings that can accommodate them.

Not only can GHPs cut energy costs for heating and cooling by up to 80%, they can also provide other benefits such as essentially free hot water when in cooling mode, lower reliance on fossil fuels, and the elimination of above ground outdoor equipment.  These advantages have earned GHPs a small but dedicated cult of true believers, but not broad market acceptance.

The world has not yet beaten a path to the GHP door.  Instead, GHPs have a slim and only modestly growing market share.  A study by  Frost and Sullivan projects  the market for GHPs in North American commercial buildings to grow at a 7.8% annual rate from 2012, 4.7% faster than the North American climate control market as a whole. An industry representative pointed me to a Navigant study which projects the world installed base to grow from 13.3 million tons to 36.2 million tons in 2020, see chart below.

Navigant installed capacity.png

Unfortunately, growth in installed base is not comparable to industry sales. For a young industry with a low installed base, sales are approximately the increase in the installed base.  I eyeballed the chart to get annual estimates of  world sales from the chart, and found that Navigant is projecting less than 5% sales growth in 2013 to 2015, followed by rapid growth (20-30%) in the 2016 to 2018 time frame.  Navigant’s discussion makes clear that the later rapid growth rates require a revival of the economy and easier access to capital.

In the short term, Navigant’s study seems less optimistic than Frost & Sullivan’s, while it is more optimistic in the medium to long term. Using either projection, the near term less than 5% annual market share growth is clearly not the type of market transformation many would expect from a “better mousetrap.”  Does the rapid market growth Navigant expects after 2015 have to depend so greatly on easy access to capital?  Are other factors holding the GHP market back?

Siege Mentality

I struck a few raw nerves when I asked if air source heat pumps are a threat to geothermal heat pump suppliers last month, despite the fact that I answered my own question with a “No.”

Except in moderate climates, super-insulated homes, or situations where the installation of a geothermal heat pump (GHP) would be particularly difficult, GHPs have the better economics.  This is despite recent advances in air source heat pump (ASHP) technology, which led me to ask the question in the first place.  ASHPs don’t provide hot water, while many GHP systems can.  Also, as the recent heavy snows in the Northeast demonstrated, there are some advantages to having a heat exchanger which is not exposed to the elements (see pic).

ASHPs Snow.jpg
One advantage of a geothermal heat pump’s ground loop compared to the air source heat exchangers shown is that you don’t have to dig them out after a snowstorm. This pic also shows an installation problem which is allowed under manufacturer specs, but may lead to less than optimal performance if both pumps are operating simultaneously: one heat exchanger blows air directly at the other. This problem is analogous to poor ground loop design for GHPs.

Given all these advantages, why the raw nerves? I suspect it’s because geothermal heat pump sales continue to disappoint and proponents are looking for someone to blame.

ASHPs in Net-Zero Buildings

Another target of geothermal advocates’ ire is Marc Rosenbaum (who teaches the online Net Zero Energy Homes course in the Northeast Sustainable Energy Association’s Building Energy Masters Series.)  He also raised hackles when he recommended minisplit air source heat pumps (ASHPs) for most single family net zero homes (I quoted Rosenbaum extensively in the previous article.)

He relates the story of the Putney School’s 16,000-square-foot Net-Zero Field House.  The team designing this building modeled its heating costs using a GHP, and also using ASHPs with additional solar photovoltaics  sufficient to provide the extra electricity needed to run the ASHPs.  They found that it was cheaper to expand the solar system to power the ASHPs than it would have been to pay the extra installation costs of a GHP.   Furthermore, the price of solar has fallen significantly since the Putney Field House was built; the price of the ground loop for a GHP has not.

Nevertheless, Rosenbaum’s preference for ASHPs in highly insulated buildings does nothing to explain GHPs’ low market share growth rate.  Net Zero buildings are the exception, not the rule, and have a far lower market share than geothermal heat pumps.  When the heating load is very low, the operating cost advantage from the greater efficiency of GHPs is not enough to repay the additional installation costs.  That is not the case in 99.9% of new and existing buildings today.

GHPs Almost Everywhere Else 

My own home, a farmhouse built in 1930, is much less efficient and requires a lot more heat than a Net Zero home, despite my own significant improvements.  I don’t have enough suitable roof space for photovoltaics to make up for the extra energy ASHPs would require, even if that could be done economically.  I opted for four ductless minisplit ASHPs rather than a GHP system, but it was because the minisplits allowed me to do the install without adding air ducts.  Adding air ducts to my 85 year old home would have significantly increased the cost and disruption of installing a GHP system.

ClimateMaster, a division of LSB Industries (NYSE:LXU), makes a ductless split system called the Tranquility Console Series which probably would have been suitable for my needs, but I did not know about it until I received comments on an earlier version of this article telling me about it, nor did any of the geothermal installers I spoke to.  Unfortunately, the efficiency ratings are low for GHPs with a COP of 3.3 in the ground loop configuration. This is not much better than the Mitsubishi air source units I had installed, which operate at a COP of around 2 from around -10° to 20°F outdoor temperatures, and exceed 3.3 COP when the ambient temperature is 35°F or more.  The added efficiency at low temperatures would probably not have been sufficient to pay for the ground loop, but I would have been interested to get a quote.  Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) offers the Envision Series Consoles with slightly higher heating efficiency (up to 3.5 COP) for certain models.

Mr Slim COP.png

Since GHPs are economic in most situations, other factors must be holding them back.

The relative complexity of a geothermal system is one likely suspect.  As Rosenbaum says about ASHP minisplits,

“[O]ne thing I really like about the minisplits is how they are packaged systems from a single supplier, and are highly engineered as a system and therefore very reliable. GSHP systems are, at least where I have practiced, essentially custom engineered and installed, usually by several entities who have a shared responsibility to make sure the systems perform.”

Given the large up-front cost of a GHP system, the risk of a poor installation is likely to deter nonprofessionals from using GHPs even more than it deters experienced professionals like Rosenbaum.

The Curse of Complexity 

The cure for installation risk would be a way to validate the performance of GHPs in the field, and track problems back to their source.  When contractors lose the ability to blame others for their mistakes, they quickly stop making those mistakes or they go

out of business.  Without such monitoring, it’s nearly impossible to track increased electricity use back to the source.

I recently spoke to Matt Davis, the co-founder of Ground Energy Support and a professor of hydrology at the University of New Hampshire.  Ground Energy Support provides GHP monitoring to GHP owners and contractors, as well as data and analysis to support the development of the industry.

Ground Energy Support recently published a 14 page Homeowner Guide to Geothermal Heat Pump Systems.  While I found the guide easy to understand, it makes clear that GHPs are not for everyone.  The start of the guide directly helps homeowners decide if they and homes are suitable for a GHP, while its length indirectly makes the point that GHPs are not always “plug and play.”  The six pages dedicated to finding and selecting a suitable GHP installer indirectly makes clear that the process is not for anyone with only casual interest in GHPs and their savings they bring.

If GHPs are to become commonplace, the process of financing and purchasing a reliable GHP system have to be simplified to the point where it becomes a matter of calling a name in the phone book.  The success of SolarCity Corporation (NASD:SCTY) in providing solar to homeowners who are more interested in the green in their checking account than the green of their electricity shows the potential.  That success is based on SolarCity’s ability to provide financing, installation, maintenance, and performance verification services internally.  All the homeowner needs to do is pay the monthly bill for electricity production.  The value proposition is simple: a hassle-free installation and savings from day one.

The SolarCity of Geothermal

Geothermal heat pumps also have the economic potential to deliver that same value proposition: hassle free installations, and reliable savings from day one.  But if the industry is to achieve this potential, several things have to come together:

  • A single company responsible for the entire installation, from engineering to installation to maintenance.
  • Reliable monitoring of heat production from the ground loop.
  • A financing tied to the geothermal installation itself, to allow a lease-like structure which allows homeowners to see the benefits from day one.

We already have the corporate and financial structures to bring the solar lease model to GHPs.  In fact, it takes little stretch of the imagination to see a solar lease company acquiring or partnering with GHP installers and offering a geothermal lease along with the solar lease to its customers.  In cold climates not known for their sunny winters such as the Northeast US, the underlying economics of GHPs are far superior to those of solar photovoltaics.  These economics should enable very attractive GHP leases, as soon as the other pieces are in place.

First, the homeowner and the geothermal lease company would have to have a reliable, objective way to monitor the performance of the GHP system.

Geothermal Monitoring

Ground Energy Support is tackling this problem with its GXTracker, which monitors the heat output of the ground loop and monitors or models the electricity consumption of the pump itself.  Heat production monitoring lets everyone know if a system is operating as designed, and helps diagnose the problem when it is not.

Of the 30 GHP systems Ground Energy Support has been monitoring for the last two and a half years, 60% have had some operational, maintenance or mechanical issue.  Most of these were minor maintenance issues or improper settings which caused only minor drops in performance, but which would have gotten worse if undetected. But 17% of the systems had significant design or installation problems.  A third of these were oversized systems which can lead to higher energy costs but were likely the result of homeowner preferences.  Another third were easily fixable and not the fault of the installer: a failed heat pump (covered under warranty), and an air duct which was left open to an unfinished garage.  The rest (high pumping penalty caused by too large a pump or too small pipes, and an undersized ground loop) could have been avoided if the homeowner had been able to vet the installers’ track records – another potential benefit of ubiquitous monitoring.

One other way proper monitoring of GHPs might help the industry is enabling the implementation of incentives for renewable heat production from geothermal ground loops, analogous to the incentives for photovoltaics.  The Massachusetts legislature currently working on a bill to allow heating and cooling with renewable fuels to benefit from the same incentives the state give to renewable electricity.  The bill states that the heat must be “verified through an on-site utility grade meter” or similar means.


Advocates of geothermal heat pumps should spend less time discussing the well established attractive economics of GHPs in theory, and more time delivering those economics.  The key to this is making the buying process simple for the customer while providing verification and taking responsibility if those economics fail the be acheived .  While GHPs are not the best fit for every home, in many climates the majority of such homes will benefit more from a GHP system than a new conventional heating and cooling system.

The solar lease is an excellent model for taking a renewable energy system and making it attractive to the general public.  The GHP industry can follow down this path, but first it has to adopt reliable monitoring as a standard feature.  This will hold installers to account for their design and implementation, while giving customers confidence that they will get what they pay for.

Adopting monitoring could start with customers wanting to know that their systems are operating as designed.  It could also begin with states like Massachusetts giving incentives for verifiable renewable heat production, or an installer deciding to break open the market by offering a geothermal lease.  UPDATE: It looks like at least one installer, Orca Energy, is alreadyoffering a geothermal lease to developers of new homes in a partnership with GHP manufacturer Bosch Thermotechnology.  New homes are a natural starting point for residential geothermal leases because of the lower installation costs and greater ease of design.

It seems to me that the group that has both the most to gain and the most power to affect change is GHP manufacturers.  If they were to include monitoring as a standard feature, they might be able to catalyze this market themselves.

To Davis’ knowledge, only Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF. Disclosure: I own this stock.) and  Modine Manufacturing Company (NYSE:MOD) currently offer any sort of energy monitoring.  Modine’s is part of their optional Orb controller.  Waterfurnace seems farthest along in this regard.  Sensors are standard on Waterfurnace’s most advanced (and efficient) models, the 7 Series.  According to the company, the thermostat retains 13 months of energy usage data.  I’m inquiring to determine if that includes heat production.

I suspect the extra costs of making such monitoring standard would be more than compensated by greater customer satisfaction and increasing sales.

Is this the start of a move by manufacturers towards better monitoring, or will change come from the bottom up?  If geothermal heat pump sales are going to soar, change will have to come from somewhere.

This article was first published on the author's Forbes.com blog, Green Stocks on February 28th.

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

March 11, 2014

Covanta: Waste Yield

by Debra Fiakas CFA

Last week Covanta, Holding Corp. (CVA:  NYSE) announced the pricing of a note offering.  The waste disposal and waste-to-energy company raised $400 million in the deal.  The new capital will make it possible for Covanta to repay some older debt when enough to spare for future expansion capital.  Covanta’s business model of using the municipal waste it collects for electricity generation is capital intensive.  What is more management has shown a penchant for acquisitions.  Just two months ago Covanta acquired two waste transfer stations from a competitor.

Covanta appears to be making good on its investments.  The company earned $45 million in net income on $2.3 billion in total sales in the most recently reported twelve months.  The company boasts a 2.1% return on assets.  That is not quite up to the average of the waste management industry, but Covanta can be given a bit of consideration.  The company converted 19.4% of its sales to operating cash flow.  For a company perpetually in need of investment capital, strong cash flows are vital.

Strong cash flows are also vital for Covanta’s dividend.  The company has raised its payout twice since initiating the dividend in March 2011.  The current yield is 3.7%, putting Covanta among the few small-cap companies in our Beach Boys Index of biofuel companies to pay a dividend.  The stock trades at 36.1 times the 2014 consensus earnings estimate, making it one of the most expensive as well.

A review of recent trading patterns suggests CVA is overbought at the current price level.  The stock has been on the rise since the beginning of February, largely in response to bullish chatter encouraged by the note offering.  Anyone considering long positions in CVA might watch for periods of trading weakness to accumulate shares.

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.

Image: Abengoa's PS20 and PS10 in Andalusia, Spain . Photo by Koza1983.

March 10, 2014

China's Solar Panel Makers Set For A Correction

Doug Young

After a massive rally over the last year, shares of solar panel makers could be set for a few months of winter following a disappointing earnings announcement from superstar Canadian Solar (Nasdaq: CSIQ) and a debt default from second-tier player Chaori Solar (Shenzhen: 002506). Such a correction was almost inevitable after last year’s huge rally and shouldn’t be cause for concern among long-term buyers of shares in top players like Canadian Solar. But shareholders of second-tier firms like Chaori might think strongly about selling their stock, as these smaller companies could easily end up getting wiped out or sold for bargain prices in the sector’s ongoing consolidation as it emerges from a 2-year downturn.

Before we look more closely at Canadian Solar’s latest earnings and why they disappointed, it’s important that we first review just how much the company’s shares have soared over the last year. Canadian Solar’s stock traded as low as $2 as recently as late 2012, before embarking on a massive rally that saw it top the $40 level this year. Other solar panel makers also surged as their sector began to rebound, but Canadian Solar led the rally by becoming the first major player to return to profitability after most players reported 2 years of losses.

All that said, Canadian Solar’s latest earnings report looks respectable enough on the surface, but clearly wasn’t strong enough to support the huge expectations that it has created among investors. The company’s fourth-quarter shipments shot up 53 percent from a year earlier, easily beating its previous guidance, and revenue also jumped 76 percent. (results announcement) Canadian Solar also managed to stay profitable, though the profit was slightly below market forecasts.

But investors were clearly spooked by Canadian Solar’s outlook for the current quarter, in which it expects shipments to reach around 480 megawatts and revenue to hit about $425 million. Both of those figures are down significantly from the fourth quarter, when the company shipped 621 megawatts worth of panels and posted $520 million in revenue. That weak outlook, which Canadian Solar blamed partly on seasonal factors and severe weather in North America, sparked a sell-off in the company’s shares, which fell nearly 11 percent after it announced its results.

Meantime, the solar sector got some more bad news when Shenzhen-listed Chaori announced it would default on an interest payment for some of its domestic bonds. (English article) The amount of the default was relatively small, with Chaori saying it couldn’t fully make a payment of 89.8 million yuan ($14.7 million) due earlier this week. It added that it could only pay 4 million yuan of the interest payment.

The fact that Chaori couldn’t make such a relatively small payment reflects the fact that many solar panel makers currently have little or no access to new financing. Most lenders and investors are reluctant to give more funds to these money-losing companies right now, and that’s unlikely to change until they return to profitability. But many smaller companies like Chaori lack the scale and resources to compete, meaning they may never return to profitability and we could see more defaults from this group in the year ahead.

At the end of the day, I do expect that shares of the largest companies are likely to take a breather for the next 6 months, following their huge run-up in 2013. That doesn’t mean we may not see one or two rallies for individual companies, especially as others follow Canadian Solar in returning to profitability. Meantime, I wouldn’t hold out too much hope for smaller players like Chaori in the year ahead, as many could face similar cash crunches due to persisting losses and lack of access to new financing from banks and private investors.

Bottom line: Shares of major solar panel makers are set for a correction this year after a 2013 rally and as their growth slows, while smaller players are likely to face a growing cash crunch.

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

March 09, 2014

Watt's Watt?

by Debra Fiakas CFA

In the earlier post on Brightsource Energy and its Ivanpah solar thermal power plant in California cited costs for the plant as well as costs for nuclear and conventional power sources.  A reader pointed out a discrepancy in those figures and it prompted me to look more closely at various sources and citations on power plant costs.  Even within one design or fuel category, costs for power plants are exceptionally site specific.  In particular variance can occur in labor, site preparation, and interconnection requirements.  Certain material and equipment costs are more volatile than others.  For example, high temperature- high-pressure pipe, electrical transformers and copper wire are high in demand in the oil and gas market as well as the power market.  When both industries are busy, costs increase dramatically.  So investors should expect quite a bit of variance across power sources and from region to region.

It is also easy to get tripped up in the power industry vernacular.  (This is where the cart left the path in the earlier article.)  Back in the 1700s when the steam engine was being perfected a smart Scotsman named Watt came up with a measure of energy conversion.  The measure became standard and of course it had to be named after him.

Yet, one Watt is not enough. In very large power complexes, it becomes unwieldy to discuss power generation in terms of Watts.   Here the Watt siblings come in handy to keep the digits at a reasonable number.  You can choose Kilo’s or Mega’s or Giga’s.  If a power plant has a capacity to produce 2,000,000,000 Watts and you want to shed all those zeros, you can choose among “2.0 billion watts” or “2,000 Megawatts” or “2.0 Gigawatts.” 

1 Joule Per Second

1 Watt

1,000 Watts

1 Kilowatt

1,000,000 Watts

1 Megawatt

1,000,000,000 Watts

1 Gigawatt
Watts are standard, but the way we talk and write about them is not.  The U.S. Energy Information Administration is among the most cited sources for Capital Cost Estimates for Utility Scale Electricity Generating Plants.  This is probably because they have a fairly detailed report by that name.  The report was most recently updated in April 2013 and expresses all costs per kilowatt.  For example, the nuclear power plant cost is listed in the EIA report at US$5,533 per kilowatt.

The Nuclear Energy Agency also provides information on nuclear power plant construction costs, but uses megawatts as their basis.   The NEA says “a typical cost for construction of a Generation III reactor between 1400 - 1800 MW in OECD countries might be in the region of USD 5 - 6 billion.”

Comparing the two sources requires some math.  First, let’s get the average for that range of sizes and costs provided by the NEA.

1,400 Megawatts

US$5 billion or US$5,000,000,000

US$3.6 million or US$3,571,429 per Megawatt

1,800 Megawatts

US$6 billion or US$6,000,000,000

US$3.3 million
US$3,333,333 per Megawatt

1,600 Megawatts

US$5.5 billion or US$5,500,000,000

US$3.4 million or US$3,437,500 per Megawatt

Now we need to either re-express the EIA numbers in Megawatts or the NEA numbers in Kilowatts to compare the two sets of numbers.

  Original Cost Equivalency Translation New Measure
EIA US$5,333 per Kilowatt 1 Kilowatt = 0.001 Megawatts US$5,333 / 0.001 US$5,333,000 per Megawatt
  New Measure Equivalency Translation Original Cost
NEA US$3,438 per Kilowatt 1 Megawatt = 1,000 Kilowatts US$3,437,500 / 1,000 US$3,437,500 per Megawatt

That was exhausting.  In the end, the two are so far apart as to bring into question the value of the cost benchmarks in the first place, from either source.  Did I mention regional variances and how power generation costs can be quite site specific?  It is also helpful to know that the EIA has recently updated it benchmark power plant costs, but the NEA’s numbers appear to be a bit older.

The EIA report on power plants cites costs for a collection of conventional fossil fuel plants.  Natural gas power plants are among the fossil fuel-type power sources.  The average is US$1,137 per kilowatt with a range of US$676 per kilowatt for an advanced conventional combustion turbine to US$2,095 per kilowatt for a conventional combustion plant outfitted with carbon capture technology.  If fuel cells using natural gas were also included in this category, it would hold the dubious record as the most expensive at US$7,108 per kilowatt.

The EIA report also indicates a cost of US$5,067 per kilowatt for solar thermal power which we could have compared to our source for the cost of BrightSource’s Ivanpah power plant.  It would have been a tip-off that the cost of US$5,500 per megawatt cited in the article on Brightsource was “off.”  The Ivanpah facility has a capacity of 377 Megawatts and a cost of US$2.2 billion. That is a cost of US$5.8 million per megawatt or US$5,836 per kilowatt (since 1.0 Megwatt = 1,000 Kilowatts).  Indeed, it appears there could be more to the discrepancy.  The Brightsource website indicates the plant has a 377 megawatt capacity, but planned capacity is apparently 392 megawatts.  Using 392 megawatts leads to a lower cost figure of US$5.5 million per megawatt.

For investors, the comparison of costs from one plant to another or even across categories has some informative value.  Yet there are limitations.  A resource poor region might find the construction of a nuclear facility compelling even if the cost per kilowatt is high in comparison to other energy sources.  It is all relative.  What is important for investors is whether future cash flows from the sale of electricity will be sufficient to allow investors to receive a return on their investment.

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

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

March 08, 2014

MiX Telematics: Global, Green, and Undervalued

Tom Konrad CFA

Disclosure: I am long MIXT.

“The MRM market has been growing quickly, and does not look like it will slow down.”

So says Clem Driscoll, President of C.J. Driscoll & Associates, a leading consultant for the Mobile Resource Management (MRM) industry.

One beneficiary of this growth has been Fleetmatics Group PLC (NYSE:FLTX.)  The company’s revenues have been growing 35% per year for the last four years.  On Friday, the company was knocked down a peg after reporting fourth quarter earnings.  The company reported greater than expected revenues, but lowered earnings guidance for 2014.

According to Driscoll, Fleetmatics’ valuation has been pulling up valuations across the industry, including a large number of private firms (which have been the subject of significant private equity activity) and divisions of other companies with businesses based around Global Positioning Systems (GPS) like Garmin, Ltd. (NASD:GRMN), Trimble Navigation Limited (NASD:TRMB) and TomTom (Amsterdam:TOM2).

MRM ratios.png

As you’ll note from the chart above, MiX Telematics (NASD:MIXT, JSE:MIX) stands out for its modest comparative valuation, especially with respect to Fleetmatics.  Unlike Trimble and Garmin, Mix and Fleetmatics are fully focused on the MRM space.  Both provide Fleet Management Solutions using a Software-as-a-Service (SaaS) model, but Fleetmatics is roughly three times more expensive per share based on sales (P/S), book value (P/B), and trailing earnings (P/E).  Based on the price-earnings-growth (PEG) ratio, FLTX shares are more than twice as expensive as MIXT, even after Friday’s decline.  (Note that the ratios are shown in log scale in order to display them on one chart.)

MiX vs. Fleetmatics

While Fleetmatics and MiX have similar business models, they serve different groups of MRM customers.  Fleetmatics is based in the US, where the industry started, and where fleet management solutions have the highest market penetration.  MiX started in South Africa, but now serves clients in 112 countries worldwide.  The company’s founder and CEO, Stefan “Joss” Joselowitz told me in a phone interview that the move to become a global company started eight to nine years ago.  As part of the transition, he relocated to the US with his family six years ago.  MiX has offices in East Africa, Dubai, the United Kingdom, the US, Brazil, and Australia.  Joselwitz says the move has helped the company in its relationships with international clients.  The company listed its American Depository Shares (ADS) on the Nasdaq stock market with the symbol MIXT in August 2013.  Each NASD:MIXT ADS is equivalent to 25 JSE:MIX South African shares.

According to Driscoll, the whole industry is becoming more international.  Companies based in the US are expanding into overseas markets, or at least looking at overseas markets.  Joselwitz thinks it will be difficult to replicate his company’s international presence and relationships on the ground.  This infrastructure gives MiX an advantage in serving large international companies, where MiX is the market leader, especially in the Oil and Gas industry.

Different industries require different types of MRM solutions.  Oil and Gas and Utility clients require strong integration with mapping and geographical data, while the trucking industry requires hours monitoring, and miles driven on a per state basis, for the purpose of state tax reporting.  A new rule from the Federal Motor Carrier Safety Administration is expected to require electronic driver logs in trucking soon.  Driscoll expects the new requirement is likely to drive adoption of fleet management solutions in the industry, but also lead to some price erosion from increased competition.

Fleetmatics’ main market is small and medium businesses (SMBs), which require simpler solutions than sophisticated multinationals.  According to Driscoll, its offering is fairly basic, but regarded as a good solution for its target market.

Despite it’s simpler offering, SMBs have less pricing power than MiX’s multinational clientele.  At the end of 2013, the companies had active subscriptions for similar numbers of vehicles (445,000 for Fleetmatics compared to 428,500 for MiX), but Fleetmatics’ quarterly revenue was $50.1 million compared to $29.6 million for MiX, despite the former’s relatively simple offering.  Although not all revenue from each company comes from subscriptions, this equates to approximately $450 per vehicle for FLTX compared to $275 for MiX.  This greater revenue is reflected in each company’s gross margins, which are 77% for FLTX, and 66% for MiX.  MiX’s gross margin on subscriptions is slightly higher, “approaching 70%” on subscription revenue, but still low compared to Fleetmatics.

The reason MiX is able to serve its more demanding customers at a lower cost per vehicle  than Fleetmatics is its South African base.  The company keeps as many of its operations as it can in relatively inexpensive South Africa, where Joselowitz says the cost of a software engineer is half that of a software engineer in the US.  With the majority of its expenses in South African rands, and much of its revenues in the dollar, Euro, and other international currencies, a falling rand leads to an earnings boost for MiX.

Growth Drivers

New regulatory requirements such as those mentioned above for trucking may drive some growth, but they are far from the only or primary growth drivers.  Much more important is the extremely attractive financial proposition.  C.J. Driscoll & Associates recently completed a survey of fleet operators regarding their interest in MRM systems.  36% of the respondents use such a system, with higher penetration in larger fleets.

They found:

  • Most operators see a return on investment in less than a year.
  • Fuel savings were the easiest to quantify, although highly variable.  Three different managers reported $550, $850, and $1,400 per year in savings from reduced fuel costs.  One manager reported 5% to 8% fuel savings from day one because of reduced idling.
  • 31% of managers reported receiving an insurance discount as a result of using an MRM system.
  • Many managers also reported significant savings from reduced maintenance, more efficient use of driver time, and fewer accidents.

With all these benefits, it is unsurprising that customers are on the whole very satisfied with their MRM solutions.  79% reported being either very satisfied or somewhat satisfied, and only 6% reporting any level of dissatisfaction.

Driving Safely, Driving Green

While the above results make fleet management easily cost effective for most clients, the greatest safety and fuel efficiency improvements can be achieved with some sort of driver behavior modification (DBM).  These systems give drivers real-time feedback, allowing them to increase safety and reduce fuel use much more quickly and effectively than without the system.

While Driscoll says that all major MRM providers offer driver behavior monitoring as an option, its use is much more suitable for the large, sophisticated fleets which are MiX’s core customers than they are for the SMBs which are Fleetmatics’ customers.  The adoption of DBM is still in its infancy in the US.  Only 6% of the MRM customers in C. J. Driscoll’s study reported using some sort of driver behavior management system.

In contrast, MiX includes a driver behavior management system standard in its fleet management solutions. According to Joselowitz, “A standard feature of our MiX FM range of products is in-cab driver notification which is effected through audible feedback to the driver in the event of a violation. We then offer increasing levels of sophistication where we add visual feedback as well such as with the Ribas and all the way up to color displays.”  Even though most of MiX’s clients opt for the standard offering, their results show it to be highly effective.

Although I do not have comprehensive data, the results of several studies provided to me by MiX seem to confirm that the ability to monitor real time driver performance often produces amazing safety improvements.  The results are impressive even in comparison to the results reported in the C.J. Driscoll study.  MiX shared results from several Middle Eastern clients that had reduced accidents between 50% and 95%.  Such reductions would almost certainly not be possible on the much safer roads of the US and Europe, but they are impressive anywhere.

Mix safety.pngReductions in Road Traffic Accidents and Rollovers by a Middle Eastern Oil and Gas company after implementing a MiX fleet management solution in 2009.

The graph above showing a client reducing road traffic accidents from 215 to 6 in three years is not an isolated example.  Several other studies showed clients reducing accidents and accident related costs between 50% and 95% after the adoption of MiX’s solution.

In terms of efficiency, MiX’s anecdotal evidence points to customers saving from a low of 5% to as much as 27% in fuel costs after the adoption of MiX’s solution.  Most of the clients who quantified their fuel savings had efficiency gains in the low teens.

Will Insurers Drive MRM Adoption?

Overall, I find the evidence that driver behavior management significantly reduces accidents quite compelling.  It may also improve fuel efficiency more than a basic fleet management solution, but it is the increased savings which should prove compelling to insurers.  Yet insurers are only beginning to pay attention.

According to Driscoll, insurance has not yet become a selling point for MRM providers despite the 31% of managers reporting receiving a discount.  Insurers who do give a discount are more interested in the fact that the fleet manager is using an MRM system than if that system includes driver behavior management.

In an article on Telematics Update, Christopher Carver, a former program manager for commercial insurance telematics at Liberty Mutual, was quoted as saying, “Commercial insurance is waking up to telematics.  Fuel efficiency is definitively linked to lower claims costs. Improved efficiency – driving fewer miles at less busy times – means [fleet operators] are a better bet for an insurance company.”

When insurers do wake up to telematics, I expect they will push for higher adoption of driver behavior management.  That in turn should benefit MiX, which has extensive experience with driver behavior management, and the data to prove its effectiveness.


Mix Telematics is a leader in the rapidly growing fleet management industry.  More importantly, it is already a leader in a number of trends which are likely to reshape the industry in the coming years: increasing globalization, growing focus on reducing fuel costs, and an insurance-driven focus on improving driver safety.  Its South African home base and experience with demanding multinational customers gives MiX a low cost base which is likely to serve it well in a highly competitive industry.

Because of its recent listing in the US, MIXT is much less familiar to Wall Street than US-based competitors such as FLTX.  This lack of familiarity is unlikely to last.  Neither is MIXT’s low relative valuation.

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

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

March 07, 2014

Geely Joins New Energy Buying Binge

Doug Young

Chinese car makers are fueling a new global buying binge of clean-energy assets, with the latest word that Geely Automobile (HKEx: 175) is buying a British electric car startup. This is in addition to Geely announced a new joint venture to produce electric cars with Kandi Technologies (Nasdaq: KNDI).  Geely’s deal comes just weeks after China’s Wanxiang Group completed its second major acquisition of a clean energy firm in the US, hinting at a growing wave of global M&A by tech-hungry Chinese car makers. This flurry of deals also comes as China’s leading electric vehicle (EV) maker, BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF), spotlights new government data that showcases its own technology development prowess.

Perhaps I’m being a bit cynical, but all of these latest developments seem at least partly aimed at drawing attention to the development and acquisition of intellectual property by the Chinese car makers. Companies in most western markets wouldn’t typically seek attention for this kind of acquisition and development, and would instead focus on promoting and publicizing their actual products, which in this case would be their latest electric and hybrid vehicles.

But this is China, a place where companies all feel at least a certain obligation to show they are complying with the latest goals and policy directives from government leaders in Beijing. In this case, central leaders are under growing pressure to breathe new life into an aggressive but sputtering government program to add millions of clean-energy vehicles to China’s congested roads. The imperative has gained more urgency in the last week, following a prolonged period of heavy smog in Beijing that has attracted global headlines and is once again shining a spotlight on China’s polluted air.

All that said, let’s look at the latest headlines from Geely, one of China’s most acquisitive automakers, which has confirmed its recent purchase of a British new-energy auto startup called Emerald Automotive. (English article) No actual price was given, but the reports say Geely has pledged to invest at least $200 million into Emerald’s operations over the next 5 years. Emerald is currently working on 2 prototype electric delivery vans, though Geely says the same technology could be used in electric powered taxis.

The reports indicate that Geely may use Emerald’s technology to help produce just such taxis for Manganese Bronze, the storied cab maker that fell on hard times and became insolvent before Geely bought it last year for just $18.5 million. (previous post) I suppose I should applaud Geely for at least trying to find some innovative ways to resuscitate Manganese Bronze, though I have serious doubts about whether electrifying its taxis is the right solution.

Geely’s latest new energy plan comes just weeks after Wanxiang won the bidding to buy US-based Fisker Automotive, another former high-flyer that also fell onto hard times. Last year Wanxiang also purchased another former new energy superstar when won the bidding for battery maker A123 Systems in a US bankruptcy court. Perhaps not too coincidentally, BYD has just put out a completely separate announcement trumpeting its position as China’s fifth most prolific recipient of new patents last year, behind only telecoms stalwarts Huawei and ZTE (HKEx: 763; Shenzhen: 000063), state-owned energy giant Sinopec (HKEx: 386; Shanghai: 600028; NYSE: SNP), and leading microchip maker SMIC (HKEx: 981). (company announcement)

Obviously it's an oversimplification to tie all of these developments to one week of smog in Beijing, or to the opening of the National People’s Congress, an annual event starting this week where company executives like to showcase their efforts to assist central government initiatives. But that said, this sudden flurry of activity to develop and acquire new clean energy technology certainly has some political overtones, and probably presages more similar deals and announcements in the year ahead.

Bottom line: Geely’s new energy purchase in the UK could presage a new round of similar overseas acquisitions by Chinese firms eager to show their support for Beijing’s clean auto initiatives.

Doug Young has lived and worked in China for 16 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

March 06, 2014

Tesla's Gigafactory: Guessing Games

James Montgomery

Tesla Motors (NASD:TSLA) made a splash last week with its proposed $5 billion "Gigafactory" and its eye-popping numbers: a 10 million square foot facility on an entire land area of 500-1,000 acres, with output of 35 GWh/year of battery cells and 50 GWh/year of battery packs by 2020. That'll be enough to support 500,000 of the company's forthcoming Gen-3 vehicles, compared with a little over 20,000 annual demand for its cars today. By comparison, the entire lithium-ion battery supply-chain produced about 34 GWh in 2013, the vast amount going not to electric vehicles but consumer electronics.

That's a very big bet on future demand, so it makes sense for Tesla to have other plans in case the market doesn't quite take off and it's stuck with overcapacity. The answer: allocate some of that capacity to stationary energy storage systems for backup power, peak demand reduction, demand response, and wholesale electric market services. Speaking at a California Public Utilities Commission thought-leader panel, Musk reiterated that an unspecified amount of Gigafactory's capacity will be earmarked for "large-scale use of stationary storage." Since last year Tesla has been contributing batteries to SolarCity (NASD:SCTY) for incorporation into solar + energy storage systems for both residential and commercial customers. (Expansion of solar and wind, Musk added, is causing "strife" for existing utilities.)

The key to Gigafactory, for either cars or stationary storage applications, is in its sheer scale which is hoped to compress costs right from the start. Tesla says it will reduce battery pack cost/kWh by more than 30 percent by the time its third-generation vehicles ramp in 2017. Battery systems for stationary energy storage applications are a bit different -- air-cooled, a simpler battery management system, and it's all around a lot cheaper. It's not uncommon among Asian manufactures to have multiple variations of a battery cell coming off individual lines, pointed out Sam Jaffe, senior research analyst at Navigant Research. There's also the possibility that the company could tweak its battery chemistry used in Gigafactory, though probably still a variant of lithium-ion. A Tesla spokesperson declined to comment on any Gigafactory specifics.

Battery production by manufacturer

Credit: Tesla

Nor did the company explain the proposed gap between Gigafactory's 35 GWh in annual battery cell output vs. 50 GWh in battery packs. There hasn't been any confirmation of who Tesla's major partners will be in this new Gigafactory, but it's widely assumed that longtime battery cell partner Panasonic will be in, and maybe bring some of its supply-chain friends. Tesla and Panasonic have a long and deep connection, almost to the point of mutual codependency; it's the opposite of typical multi-sourcing strategy seen in other industries, and it's hard to imagine it *not* continuing with this Gigafactory. On the other hand, it's possible that Tesla is smartly keeping its cell supplier options open, in the belief that sheer volume will override its need to slash costs and dent suppliers' margins. "That's a really fine line to walk," Jaffe observed.

There's another angle here relevant to renewable energy: Tesla says it wants to "heavily power" the new factory with solar and wind. Battery manufacturing is very energy-intensive, running ovens and manufacturing equipment and charging the batteries at least one cycle as a final step, explained Jaffe. That equates to usage in the hundreds of megawatts. A drawing in the slide presentation shows both solar and wind farms located adjacent to the factory. One also could speculate that they could achieve that by purchasing RECs or by investing like Google (NASD:GOOG) in someone else's developments.

Where to put this massive factory is still being decided, but the shortlist is Texas, Arizona, New Mexico, and Nevada. The San Jose Mercury News' Dana Hull neatly handicapped the field and lists some advantages: the company's previous facilities-tirekicking in Arizona and New Mexico, proximity to rail and possibly Apple and some other energy-storage-hungry industries.) Certainly those U.S. Southwest locations favor solar energy; overlaid with strong wind energy areas might narrow that a bit further. Gigafactory construction is pledged to begin by this fall according to those same slides; it's not clear whether that includes the solar/wind contribution. Such utility-scale projects don't simply materialize in a couple of months, however, so one could speculate that a factor in Gigafactory's final location selection might be siting near existing projects or ones already well down the development path.

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

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

March 05, 2014

Ten Clean Energy Stocks For 2014: March Update

Tom Konrad CFA

After a rough January, the stock market recovered in February, while clean energy stocks partied like it was 2013.  My annual Ten Clean Energy Stocks model portfolio also had a good month, rising 6.0%, and is now up 4.7% for the year in dollar terms, and up % in local currency terms.  My broad market benchmark (the iShares Russell 2000 index) is up 7.5% for the period and 1.5% for the year.  Clean energy stocks soared higher, with the Powershares WilderHill Clean Energy ETF (NYSE:PBW) up 16.3% for the period and 15.7% for the year.

Turning to individual stocks in the model portfolio, several companies have reported 2013 results.  I cover this and other significant news below.
10 for 14 March.png

Individual Stock Notes

(Current prices as of February 3rd, 2014.  The "High Target" and "Low Target" represent the ranges within which I predicted these stocks would end the year, although I expect a minority will stray beyond these bands due to unanticipated events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
Current Price: $14.05. 12/26/2013 Price: $13.85.   Annual Yield: 6.3%.  Low Target: $13.  High Target: $16. 
YTD Total US$ Return: 1.4%

Sustainable Infrastructure REIT Hannon Armstrong announced full year results.  While management reaffirmed their 13% to 15% target for core earnings and dividend growth, the company took a provision of $0.69 per share on investment in a geothermal loan, which was a larger  write-down than I had anticipated. Some of this may be recovered in future quarters.

Because of the loss, management presented significant details about the credit quality of its other assets in the conference call, 96% of which is investment grade.  This seems to have reassured investors, as the stock has been rising to bring its yield more in-line with other clean energy income stocks.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
Current Price: C$5.30. 12/26/2013 Price: C$4.85.   Annual Yield: 4.5%.  Low Target: C$4.  High Target: C$6.
YTD Total C$ Return: 10.5%. 
YTD Total US$ Return: 6.8%

Green Building company PFB scaled back its stock repurchase program in February, but board member and large shareholder, Edward Kernaghan has continued his purchases, buying 3,700 shares since the last update.  The company paid its regular C$0.06 dividend in February.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
Current Price:
C$3.84. 12/26/2013 Price: C$3.55. Annual Yield: 7.8%.  Low Target: C$3.  High Target: C$5.  
YTD Total C$ Return: 10.3%
.  YTD Total US$ Return: 6.6%

Independent power producer Capstone will hold its annual results conference call on March 7th.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
Current Price: C$5.44. 
12/26/2013 Price: C$4.93.  Annual Yield: 4.1%.  Low Target: C$4.  High Target: C$7. 
YTD Total C$ Return: 11.5%
.  YTD Total US$ Return: 7.8%

Waste heat recovery firm Primary Energy announced the long-anticipated recontacting of its largest facility on Friday.  In the two trading days since, only 920 shares have traded, compared to a three month average daily trading volume of over 20,000 shares.  This reflects a lack of willing sellers as shareholders await the company's annual results, to be released on March 18th.

5. Accell Group (Amsterdam:ACCEL, OTC:ACGPF).
Current Price:
€14.27. 12/26/2013 Price: €13.59.  Annual Yield: 3.9%.  Low Target: 11.5.  High Target: €18.
YTD Total 
Return: 5.0% .  YTD Total US$ Return: 5.0% 

Bicycle manufacturer and distributor Accell announced annual results on February 21st. Sales increased 10%, led by a 23% increase in e-bike sales.  Earnings declined 18% mostly due to reorganization costs.  The company proposed a €0.55 annual dividend, to be approved at the annual meeting. The lower earnings and dividend were expected, and the stock has reacted favorably since the announcement.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
Current Price: C$11.33. 
12/26/2013 Price: C$10.57.  Annual Yield: 5.2%.  Low Target: C$8.  High Target: C$16. 
YTD Total C$ Return: 8.1%
.  YTD Total US$ Return: 4.5%.

Leading transit bus manufacturer New Flyer will announce annual results on March 19th.  The company paid its normal C$0.04875 monthly dividend.

7. Ameresco, Inc. (NASD:AMRC).
Current Price: $9.99
12/26/2013 Price: $9.64.   Annual Yield: N/A.  Low Target: $8.  High Target: $16. 
YTD Total US$ Return: 3.6%.

Energy performance contracting firm Ameresco will announce its annual results on March 13th.  The Pentagon announced that Ameresco is now eligible to bid on projects included in its $7 Billion green energy program.

8. Power REIT (NYSE:PW).
Current Price: $9.25
12/26/2013 $9.34 Price: $8.42Annual Yield: N/A.  Low Target: $7.  High Target: $20.
YTD Total US$ Return: 9.9%

I took a look at the preferred stock offering from solar and rail real estate investment trust Power REIT, and decided to invest.

9. MiX Telematics Limited (NASD:MIXT).
Current Price: $11.88.
12/26/2013 Price: $12.17Annual Yield: N/A.  Low Target: $8.  High Target: $25.
YTD Total US$ Return: -2.4%

Global provider of software as a service fleet and mobile asset management, MiX Telematics, announced its fiscal third quarter results on February 6th, including slightly-better than anticipated growth in its closely watched subscription revenues.  After the results were out, I interviewed CEO Stefan Joselowitz and industry expert Clem Driscoll.  I had initially included MiX in this portfolio because I felt it was the best valued company is a rapidly growing industry which can significantly reduce fuel uses and improve driver safety. 

After doing the research for that article, I am even more enthusiastic about the company.  In addition to the stock being a better value than those of its competitors, I believe MiX is a leader in globalization and its tools to provide driver feedback, which improve efficiency and safety.  Given the recent stock pullback, I added to my holdings, and consider the current price an excellent entry point.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
Current Price: C$0.30
  12/26/2013 Price: C$0.28.   Annual Yield: N/A.  Low Target: C$0.20.  High Target: C$0.60.
YTD Total C$ Return: 7.1% .  YTD Total US$ Return: 3.6%.

Renewable energy developer and operator Alterra Power completed the acquisition of a 202 MW wind development and announced the results of its 66% owned Icelandic subsidiary, HS Orka.  Revenues and electricity production increased, but EBITDA and income were down, mostly due to one-off factors. HS Orka continues to use most of its cash flow to rapidly pay down debt.  This cash flow should be available for other uses from 2017 onwards.

Two Speculative Penny Stocks for 2014

Ram Power Corp (TSX:RPG, OTC:RAMPF)
Current Price: C$0.08   12/26/2013 Price: C$0.08.   Annual Yield: N/A.  Low Target: C$0.20.  High Target: C$0.60.
YTD Total C$ Return: 0% .  YTD Total US$ Return: -3.3%.

Geothermal power developer Ram completed the remediation of its San Jacinto-Tizate project on January 22nd, and expects to complete a plant capacity test in March.  Management expects the remediation to have increased the  plant capacity to between 58 and 63 MW.  We can expect the stock to appreciate significantly if it is in the upper part of the range.  If it fails to reach 58 MW, look out below!

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
Current Price: C$0.075   12/26/2013 Price: C$0.075.   Annual Yield: N/A.  Low Target: C$0.20.  High Target: C$0.60.
YTD Total C$ Return: 0% .  YTD Total US$ Return: 0%.

There were no updates from wind project developer Finavera.

Final Thoughts

Clean energy stocks are starting off the year at a blistering pace.  Although my picks have not kept up, I'm very happy with the 4.7% return from these relatively conservative and income-heavy stocks.  Of the ten, only MiX is down, and I'm also happy to see the stock there for now.  Its recent US listing only came to my attention in December, and the current weakness comes at an opportune time, as I am becoming more enthusiastic about the company's long term prospects.


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

March 04, 2014

Solazyme and the Year of Living Dangerously

Jim Lane
solazyme logo

Solazyme steps up to slay the scale-up dragon.

Will the company stay on its scale-up schedule, at the final step where Amyris, Gevo and KiOR ran into crushing delays?

In California, Solazyme (SZYM) announced results for the fourth quarter and full year ended December 31, 2013.

The Results

Q4 Revenue (vs Q4 2012): $11.3M (+34%)
Q4 Net (vs Q4 2012): -$33.3M (+35%)
2013 Revenue (vs 2012): $39.8M (-10%)
2013 Net (vs 2012): -$116.4M (+40%)

So — widening losses, falling annual revenue. So, why the excitement amongst most of the analysts?

2013 Highlights

Scale-up: Completed construction at 20,000 MT Archer-Daniels-Midland Company (ADM) facility in Clinton, IA; downstream companion facility operated by American Natural Products in Galva, IA; neared completion of 100,000 MT SB Oils facility in Brazil.

R&D Partnerships: Partnership inked with Mitsui & Co., new JDA with AkzoNobel, and extension of JDA agreements with Bunge Limited and Unilever.

Offtake: 10,000 MT supply agreement inked with Unilever; also, agreements with Goulston Technologies and Koda Distribution Group.

New platforms: Development announced with myristic, oleic, erucic, capric and caprylic Tailored oils.

Algenist Sales Growth: Algenist revenues totaled $19.9 million in 2013, a 21% increase versus 2012. The Algenist brand also won the 2014 Marie Claire Prix d’Excellence de la Beauté in France. Algenist was unanimously selected by the judging panel.

Bunge's Moema sugar mill
Bunge's Moema sugar mill

Bunge’s Moema sugar mill

The analyst bulls speak:

Pavel Molchanov, Raymond James

Price target: $12.50. The versatility of Solazyme’s algae-produced oils opens the door to wide-ranging opportunities across the fuel, chemical, personal care, and nutrition markets. While fully recognizing the inherent execution risks in early-stage industrial biotech, we are bullish on the roadmap to commercialization, with two major proof points during 1H14. The balance sheet is also in great shape, with the largest cash balance in the peer group, virtually eliminating equity dilution risk over the next 12 months. We reiterate our Outperform rating.

Ben Kallo, Tyler Frank, Baird

Price target: $18. We reiterate our Outperform rating and are increasing our price target to $18 following SZYM’s Q4 earnings. SZYM made critical strides during Q4 and the first part of 2014 in commercializing its Clinton, IA factory and began commissioning its factory in Brazil. Although scale-up risk remains, early runs show that SZYM can produce and sell several types of oils at commercial scale. We will continue to follow its production ramp and would be buyers of the stock at current levels.

Rob Stone, James Medvedeff, Cowen & Co

Price target: $17.00. The Q4:13 loss per share of 49c was wider than St. (38c), but essentially in-line with our (48c) estimate on higher expenses, mainly Clinton startup costs. Clinton is in production. Moema has begun fermentation at 125K liter scale; full production is expected in March/April. We cut estimates to a more conservative ramp/ASP/GM profile, but raise our PT to $17 (vs. $14) as startup risks are easing.

The Bear: Mike Ritzenthaler, Piper Jaffray

Price target: $4.00. We maintain our Underweight rating and $4 price target on shares of SZYM following a 4Q print that included a GAAP EPS loss of ($0.40) on revenues of $11.3 million versus PJC estimates of ($0.28) on $11.8 million. Looking past the shortfall in sales relative to our estimate and the company’s guidance, our main takeaways from the results and the call last evening are that product prices will not likely be above $2k per MT this year, that Solazyme likely lacks sufficient liquidity to ramp both Clinton and Moema to full rates, and that the Moema startup is likely a 2Q event (versus management’s previous target of 1Q).

In the Outlook


Molchanov notes: “Clinton producing, Moema is next. On December 23, we noted that Solazyme is on the cusp of two major milestones along its commercialization roadmap. The first of these materialized on January 30, as commercial-scale production began at the Clinton, Iowa plant, a project built in collaboration with Archer Daniels Midland.

“Consistent with past commentary, production at the Clinton facility will ramp over 12 to 18 months – along a back-end-loaded “S curve” – until reaching nameplate capacity of 20,000 metric tons per year. (Year-to-date, 500 metric tons among three distinct products have been produced, with selling prices averaging $2,600/ton and the high end at $3,700/ton.) Over time, there is room to expand capacity to 100,000 metric tons per year.

“This also happens to be the capacity of the Moema plant in Brazil (a joint venture with Bunge), which is currently being commissioned, with fermentation set to start in March and product recovery in April. At that point, Solazyme will be the first player in the algae bioindustrial arena to have achieved commercial-scale production in both North and South America.”

Ritzenthaler cautions: “Notables from the call include pricing pressure and further delays at Moema. Management stated on the call that they do not expect initial ASPs to be above $2k per MT – a harbinger, in our opinion, of the effects of building capacity ahead of demand. We do not share management’s confidence in their long-term margin targets, with straight-forward production economics combining with what we believe to be a lower level of pricing power to paint a very different picture. With the Recovery area still under construction, and four weeks to the end of 1Q14, the startup of Moema on an integrated basis will almost certainly be a 2Q event.

Positive cash flow

Molchanov says: “Positive cash flow on tap for 2015. While the ramp-up of production will certainly not be linear – as is always the case in industrial biotech – we anticipate utilization rising to 50% in 4Q14. This translates to a nearly four-fold increase in total revenue from 4Q13 to 4Q14. To be clear, Solazyme can get to positive cash flow at the corporate level (in 2015) even before full utilization at either Clinton or Moema.”

Kallo & Frank add: “Two commercial factories ramping in 2014. Clinton is currently producing ~500 MT per month and Moema is on track to begin commercial production by Q2:14. Importantly, SZYM scaled three different oil-based products at Clinton and has a fourth underway. Management believes the ramp of both (Clinton and Moema) facilities will take 12-18 months and expects to be cash flow positive by 2015.

Averaged price target (4 analysts)

$12.87. Feb 28 closing price: $12.27.

Reaction from Solazyme

“2013 was a year of great progress for Solazyme as we readied our first major capacity projects, signed new commercial supply agreements, added important joint development partners, and further expanded our portfolio of Tailored oils,” said Jonathan Wolfson, CEO of Solazyme. “In the first half of 2014, we are focused on successfully executing Solazyme’s entry into broad commercial operations. We have begun shipping multiple products from the Clinton/Galva, Iowa facilities and are deep into commissioning in Brazil as we complete the first-of-its-kind 100,000 MT Solazyme Bunge Renewable Oils (SB Oils) facility at Moema. In these early days we are focused on generating consistent and reliable production for our partners, ahead of accelerating our production ramp later this year.”

“Solazyme’s 2013 results included 21% growth in our most commercially mature business, as our Algenist skin care line expanded its product offerings and geographic footprint. We also delivered on all of our joint development milestones for our partners,” said Tyler Painter, CFO of Solazyme. “We anticipate continued growth in these revenue streams in 2014 and look forward to growing product revenues from commercial supply of our products later this year as we ramp commercial production. In the meantime, Solazyme remains in a healthy financial position as we complete our first plants and prepare to broadly scale operations.”

The Digest’s Take: The Year of Living Dangerously

2014 is Solazyme’s take-off year. After more than a decade as a development-stage company, now begins the real-scale up of operations and revenues.

We’ll know about scale-up by year-end — by then, SZYM will be past the Hillary Step where AMRS, KIOR and GEVO stumbled…or not. We also should know if the product demand is there at prices that meet the market’s anticipations.

Incremental steps along the way. Mechanical completion on all aspects in Q2. And look for any warnings on the commissioning process in Q3, plus news on the customer front.

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

March 03, 2014

New Suntech Rises From Ashes, Eyes UK

Doug Young 

Suntech. faces final sunset.

Opportunities for me to write about former solar pioneer Suntech (OTC: STPFQ) are growing fewer with each passing day, as its life as an independent company nears an end with the imminent finalization of its bankruptcy liquidation. That said, a company announcement saying that a new Suntech has emerged after the yearlong bankruptcy storm seems like a good opportunity to write about this company one last time before it and its stock permanently disappear. The announcement features a photo of Suntech’s youthful looking new CEO, Eric Luo, and says the company is preparing a new push into Europe, starting with Britain. (company announcement)

Before we go any further, I should point out this new announcement is coming from Wuxi Suntech, owner of the main production assets of the original Suntech Power Holdings, which was formally forced into bankruptcy about a year ago after defaulting on more than $500 million in debt. Wuxi Suntech was auctioned off as part of the bankruptcy liquidation process, and was purchased by Hong Kong-listed Shunfeng Photovolatic (HKEx: 1165) last year.

In its latest announcement, Wuxi Suntech says its sale to Shunfeng will close imminently, which means the parent Suntech’s bankruptcy liquidation plan is also close to finalization and will likely be approved by its creditors. I would expect all of that to happen sometime this month, at which time the original Suntech will formally be disbanded and become a chapter in future history books on solar energy.

To this day, stock buyers don’t seem to have a strong idea of how much their holdings in the original Suntech are worth, as reflected by the stock’s wild swings even as the final liquidation approaches. In the latest session alone, the stock rose 30 percent, recouping some of the losses from a 40 percent slide over the previous month. I expect we’ll see one or two more major swings before the final plan is approved, at which time investors will finally lose this popular betting vehicle.

The latest announcement says that Wuxi Suntech will remain as an independent entity after its sale to Shunfeng is complete, which means the brand will stay intact. The statement also implies that Suntech may become the flagship brand of the new Shunfeng, which isn’t a huge surprise due to Suntech’s status as one of the industry’s most recognized names. Luo says the new Suntech will also make some strategic acquisitions, and that it expects to ship a record 2.5 gigawatts worth of panels for this year, 20 percent higher than its previous peak in 2011.

While Suntech’s shares have swung wildly over the last year, Shunfeng’s have been on a more positive trend, rising from their previous level of about HK$1 as recently as last June to around HK$7 at present. I’ve previously said that Shunfeng could be a company to watch going forward, and do expect it should benefit strongly from Suntech’s strong brand, as well as its technology and sales networks. I wouldn’t be surprised if Shunfeng ultimately takes the Suntech name as its primary brand, though it will probably want to wait at least a year until the bankruptcy is well in the past.

I should close out this post with a final memorial to Suntech, whose biggest fault was probably hubris. Founder and former chief executive Shi Zhengrong will be remembered as a visionary for his early entry to the market, becoming the first solar panel maker to list in New York in 2005. But too much praise for his firm and his own self confidence led Shi to take unnecessary risks that ultimately led to Suntech’s downfall, ending a brief but turbulent life for this colorful but ill-fated sector pioneer.

Bottom line: Shunfeng could position Suntech as its leading brand after finalizing its purchase of the company’s main assets, and could use Suntech as a platform for future acquisitions.

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

March 02, 2014

Solar Investing Grows Up

Tom Konrad CFA

Disclosure: Long HASI, BEP. Short PEGI calls, NYLD calls.

When I was asked in an interview last month what I thought 2014 would hold for green tech finance, I said 2014 would be the year that “renewable energy finance comes of age.”

What I mean is that a new type of renewable energy investment is proliferating.  Solar, other renewables, and energy efficiency investments are no longer limited to risky growth plays like Tesla Motors (NASD:TSLA.)   There are now a number of yield focused investments available to small investors.  As of last year, there was a mostly hydropower partnership: Brookfield Renewable Energy Partners (NYSE:BEP), an energy efficiency focused Real Estate Investment Trust (REIT): Hannon Armstrong Sustainable Infrastructure (NYSE:HASI), and a wind power focused “Yieldco”: Pattern Energy Group (NASD:PEGI.)  There is also a solar crowd funding platform, Solar Mosaic.

In that same interview, I predicted: “I think that we will see a few publicly traded ‘yield cos’ (yield companies) in solar listed in 2014.”   In other words, I predicted that 2014 would bring IPOs for two or more companies investing in solar and offering attractive dividend yields.  On Wednesday, SunEdison Inc. (NYSE:SUNE) submitted  a draft registration for what is likely to become the first US IPO of a solar yieldco.  Other groups such as Grid Essence and CleanREIT Partners are currently raising funds for solar yieldcos to be listed in Canada.

The rapid increase of green yield vehicles in the US and abroad has made it possible to build a high-yield diversified equity mutual fund for investors frustrated with the growth-only character of the existing green mutual funds. I’m working with Green Alpha Advisors on launching just such a strategy (currently available to individual clients of Green Alpha in separate accounts.)  We hope to follow this with a fossil free mutual fund following the same strategy if there is sufficient demand.  I personally think that the yield, which is near 5%, is likely to stimulate that demand.  When such mutual funds and exchange traded funds (ETFs) are available, it will create a new source of funding for green infrastructure companies, and further stimulate the growth of the sector.

Relative Pricing 

Another aspect of an industry growing up is more rational relative pricing between stocks.  I’ve highlighted the relative mispricings I saw among the current crop of green yieldcos on January 29th and the beginning of convergence on February 10th.  The last week and a half has seen continued convergence, as you can see in the updated graph below, with data from 1/29 (palest circles), 2/10, and 2/19 (darkest):

green infra cos 3.png

The only significant move came from Hannon Armstrong, which was initiated by FBR Capital at Outperform.  The analyst, Aditya Satghare, was quoted:

“We expect Hannon Armstrong to lead the industry in new financing structures in its core energy efficiency asset class while rapidly diversifying its portfolio into on-site renewable generation and other infrastructure-type assets.  In our opinion, the convergence of energy efficiency and on-site generation should effectively double the company’s potential addressable market, and we estimate that this, coupled with an under-levered balance sheet and expanding net interest margins, should drive annual dividend growth of 20% over the next three to five years. Energy efficiency as an asset class is still in the very early stages of development, offering low loss rates and limited interest rate risk, and we believe that Hannon Armstrong should provide a strong diversification benefit to both specialty finance and other yield-oriented investors.”

He was even more bullish than I am, and set a price target of $20.


Solar has always been the poster boy for green energy.  When SunEdison or another company successfully lists a solar yieldco in the US, green energy investing will finally have come of age.  It will no longer only be for risk-tolerant stock jockeys, but will also have a place in the most conservative income portfolios.

This change should also benefit the clean energy industry.  The lower interest rates unlocked by the access to retail capital should make renewable energy’s trade-off of higher capital cost for zero fuel cost increasingly attractive.

This article was first published on the author's Forbes.com blog, Green Stocks on February 20th.

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

March 01, 2014

Green Dividend Yield Portfolio

By Harris Roen

There is a new and growing interest in the world of alternative energy investing, the search for high-quality dividend yield among green investments. To this end, the Roen Financial Report has created a Green Dividend Yield Portfolio, a select group of high-yield alternative energy stocks. Together, this selection of companies can produce a steady stream of income for the alternative energy investor. [Ed. note: The Roen Financial report uses a data provider that does not cover Canadian stocks.  These include many of the highest yielding green stocks.  The potential for global high yield green investing is even greater than discussed in this article. That data provider also missed the fact that PW has suspended its dividend, which is why the stock is included in the second graph.]

A New Source for Dividend Yield


The Green Dividend Yield Portfolio is a collection of high-yield stocks that are in the alternative energy business. Companies that fall in the “sweet-spot” of dividend yield are included, which I consider to be between 3.5% and 7.0% yield. Anything lower and the yield is not meaningful enough to be of interest, anything higher and the risks are just too great. By having a range of yields from a variety of alternative energy stocks in this sweet spot, a significant yield can be achieved with reduced risk to stock price fluctuation. Subscribers to the Roen Financial Report get access to a list of all companies in the Green Dividend Yield Portfolio along with their ranks, dividend quality rating, exclusive company reports and monthly updates.

The 15 companies currently in the Green Dividend Yield Portfolio have yields ranging from 3.5% to 6.2%. The average yield of the Green Dividend Yield Portfolio is 4.4%, which is a better than going all the way out to the 30 year U.S.Treaury. Even for lower investment grade corporate bonds (A rated), an investor would need to go to 10 years to get an equivalent yield.

Ranked Dividend Yield Stocks

Alternative energy companies in the Green Dividend Yield Portfolio are evaluated on many criteria important in determining the quality of dividend yield that a company puts out. These include dividend growth, earnings per share, free cash flow, return on equity and yield to debt risk. Companies are then compared to each other and given a dividend quality rank of 1 to 5, with 1 being the highest. This ranking gives dividend yield investors a simple yet powerful way to gauge the likelihood that a stock will be able to offer consistent or growing yields into the future.

Dividend Yield Quality

yield_to_quality_20140225[1].jpg The top 25 yielding alternative energy companies that the Roen Financial Report tracks are shown in the graph. Stocks determined to have higher quality yield are on the left, and those with lower quality yield are on the right. Though it is not a perfect fit, the stocks do graph along a clear trend line. A statistical way to determine the validity of a trend line is to look at its R2 value. This trend line has an R2 value of 0.4, which implies a significant correlation.

For many investors, owning a diversified basket of high-yield stocks is a very good strategy as part of a well-balanced portfolio. As a word of caution, though, there are dangers to weighting a portfolio too heavily in high dividend yield stocks. This is especially true in a rising interest rate environment, so be aware of the risks. Having said that, owning a collection of these high-yield alternative energy stocks can be a very attractive way to add income to a green investor’s portfolio.


Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of PW. 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.

« February 2014 | Main | April 2014 »

Search This Site

Share Us


Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner

Subscribe by RSS Feed


Certifications and Site Mentions

New York Times

Wall Street Journal

USA Today


The Scientist

USA Today

Seeking Alpha Certified

Seeking Alpha Certified

Twitter Updates