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June 26, 2014

The Safest Alternative Energy Yieldco

By Jeff Siegel

If you're a regular reader of these pages, you know I'm bullish on alternative energy yieldcos.

In fact, I've covered Pattern Energy Group (NASDAQ:PEGI) and NRG Yield (NYSE:NYLD) at length.

The way I see it, yieldcos are the next big alternative energy investments for retail investors. They enable regular investors to buy into multiple alternative energy assets that produce steady cash flow. For those not particularly keen on risk, but still want exposure to the burgeoning alternative energy space, this is a great way to do it.

The bottom line is that the alternative energy market continues to grow rapidly. Even those who are loyal oil & gas investors must admit that the growth potential in the alternative energy space – particularly solar and wind – is absolutely astounding. And this is not a trend that will peter out any time soon.

In fact, according to Bloomberg's New Energy Finance, 70 percent of new power generation capacity added between 2012 and 20130 will be from alternative energy technologies. This is huge.

Point is, there is no reason for you to not have at least a small portion of your portfolio dedicated to the alternative energy space. So you might want to take a look at the latest alternative energy yieldco to go public.

Strong Debut for Abengoa Yield

The company is Abengoa Yield (NASDAQ:ABY). This is a unit that was formed to serve as the primary vehicle through which Abengoa, the Spanish energy behemoth, will own, manage and acquire renewable energy assets. Conventional power and transmission assets are also included in the yieldco.

The IPO surged nearly 30% on its debut. Initially priced at $29 a share, it's now trading around $39. Of course, it's only been a week, and certainly the initial enthusiasm of the offering likely pushed the price up. But overall, I actually like ABY.

Abengoa is actually one of the strongest alternative energy players in the world. It has first-mover advantage in certain areas, and has well-diversified coverage across the globe with revenue-generating assets in North America, South America and Europe.

Currently, ABY owns 11 total assets which include 710 megawatts of renewables, 300 megawatts of conventional generation and 1,018 miles of transmission.

I didn't jump in early on the IPO, but will be looking to pick some up on a shake-out. The lockup doesn't end until December 10, too. So that should allow for some wiggle room throughout the summer and fall.

Of all the alternative energy yieldcos trading publicly right now, I foresee the most safety with ABY.


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

June 25, 2014

Is Clean Water Always Green? Why I <3 NY

By Bridget Boulle and Sean Kidney

Helping to push along the green muni space, the New York State Environmental Facilities Corp (EFC), rated AAA, has issued a USD 213 million green / water bond. There were 30 bookrunners on this bond with JP Morgan and LOOP Capital Partners co-leads - see prospectus.

The proceeds will be used to provide financial assistance to local governments to finance and refinance drinking water projects as well as to refund certain bonds previously issued. They expect to support 128 drinking water and wastewater infrastructure projects across the State.

Qualifying projects will be chosen based on their adherence to various state water and pollution legislation. Although the third party verification was not supplied, EFC promised to post semi-annual updates regarding such projects on their website.

Water is a complex area for green bonds as projects can have conflicting environmental and social outcomes. For example, the provision of clean water has obvious social benefits, but there are lots of good and bad choices that can be made towards that end. Water-provision investments can range from building a new reservoir and long aqueducts for transporting water, to reducing pipeline leaks (which can be vast in old and leaky city systems) and introducing better demand management measures.

The wrong decisions can end up over-using limited water resources in areas beginning to suffer decreased or more volatile rainfall as a result of climate change - and can lead to spikes in energy consumption just as we need to cut back to reduce emissions. Water infrastructure is a huge consumer of electricity - for example 17% of California's electricity is used to shift water around the State. Yes, that's right, 17%!

Water investments that don't take into account climate and energy issues can end up being positively harmful, even as they deliver nice clean water.

From a creditworthiness perspective, as our friends at Ceres have shown, the level of climate-preparedness in water utility and water-dependent companies should be seen as a key risk signal.

That means it would be foolish to see water projects as green by default. At minimum investors should be asking for evidence that asset management and capital expenditure plans have robust climate adaptation and mitigation thinking behind them.

The good news is that we know New York has done this! It makes me love New York. For EFC's next bond we would ask that relevant plans be specifically linked to the projects in the bond.

On the broader issue of being able to better recognize good and not so good water investments from a climate change perspective, we're working with Ceres, the World Resources Institute and CDP to make it easier for investors by developing clear criteria for water related investments. They will become part of the Climate Bonds Standard.

——— Bridget Boulle is Program Manager and 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. 

June 23, 2014

Vornado Realty Green Bond Boosts US Market, But Lacks Ambition

By Bridget Boulle and Rozalia Walencik

Last week BBB-rated Vornado Realty (NYSE:VNO) became the second US real estate investment trust to issue a corporate green bond, following the Regency Centres (NYSE:REG) bond late last month. The 5 year, $450 million bond was structured by Bank of America Merrill Lynch. Pricing was in line with non-green bonds.

Investors included asset managers, pension funds, insurance companies and governments, of which some were regular investors and others had a specific green interest. Some non-US investors also came in.

According to the prospectus, the proceeds will be used to fund buildings and retrofits that meet the following criteria:

  1. New building developments: LEED Silver, Gold or Platinum certification
  2. Existing buildings: any LEED certification level
  3. Tenant improvement projects: any LEED certification level
  4. Capital projects that “enhance energy efficiency, at buildings which currently are LEED certified at any level”
  5. Capital projects at buildings not yet certified by LEED but “which improve, based on a third-party engineering study, the operating and energy efficiency of a building by a meaningful amount.”

So where does it sit on the green spectrum? It’s certainly a good start - but perhaps we need a little more ambition to have a real impact.

A green building is one that’s “environmentally responsible”, which generally means resource-efficient in terms of energy, water, and other resource usage and in waste management.

What we’re especially concerned about is energy and emissions. The most important environmental reason to cut energy use in buildings is to reduce greenhouse gas emissions from fossil-fuel-based power grids (we’re not as concerned, for example, if energy consumed is 100% on-site solar).

The International Energy Agency (IEA) allocates some 40% to emissions avoided from reduced energy consumption; buildings are the largest consumers of energy worldwide and so the biggest contributors to emissions from energy.

The IEA tells us that deep cuts in building emissions are needed to head off catastrophic climate change, and that: “Deep renovation of inefficient existing buildings is a crucial way to achieve a much more sustainable future.” However, only “about 1% of buildings are renovated each year … the overwhelming majority of these renovations do not lead to deep energy-use reduction”.

Impact investments, from our perspective, are those that lead to those needed deep cuts in emissions.

LEED certification is a flexible environmental standard that provides many ways to achieve certification, with energy efficiency one of many priorities.

But using LEED basic ("any LEED Certification") as a criteria is not contributing much to emissions reduction. In terms of greenhouse gas emission reductions, the USGBC actually recommends that a 30% energy efficiency design goal relative to its ASHRAE 90.1, as used in LEED v2009.

As we wrote in a commentary on the recent Regency green property bond, because a retrofit only happens every few years, a “shallow” or low-ambition retrofit may mean we put off, for many years, the opportunity to make the sort of deep emission cuts we need to get out of buildings if we’re to achieve deep emission cuts. Yes that’s right: shallow retrofits can save energy and money, but may be counter-productive in terms of addressing climate change. If every building in the world aimed for LEED basic certification, we wouldn’t stay within 2 degrees global warming.

In the absence of a more comprehensive energy standard at the time of issuance, targets for % reduction in emissions/energy should demonstrate actual reductions. This could be where clause v. on the use of proceeds in of Vornado’s prospectus comes in (that's the one quoted above). We’re not exactly enthused with their use of the term "meaningful amount" (talk about "open to interpretation"), but if a percentage were specified and applied across retrofits, this could be a good way on ensure both the energy efficiency and the wider environmental benefits of LEED.

Vornado haven’t done this at this stage, but it’s possible that it will be part of the comprehensive annual reporting that they have committed to (which includes detailing LEED certification of projects funded and annual updates on a dedicated page of the website). If a third party has been used to review the bond, such an approach may have been recommended.

In summary: good start, but we need to up the ambition by raising the bar on those lower level retrofits currently allowed.

The issues we’re raising here are of course why we’ve just released new Climate Bonds Green Property definitions. These were developed with an international expert group that included folks from the US Green Buildings Council (who developed LEED). The definitions are now open for public consultation - read more here.

———  Bridget Boulle is Program Manager and Rozalia Walencik is Communications Officer at 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. Bridget has worked in sustainable investment for 6 years, most recently at Henderson Global Investors in the SRI team.  Rozalia an holds MA in Public Relations from University of Westminster and BA in Journalism and Mass Communication from Jagiellonian University in Cracow. 

June 22, 2014

Utility Expects Growth From Green Consulting

by Debra Fiakas CFA

Middlesex Water Company (MSEX: Nasdaq) has been providing the good people of New Jersey and Delaware with water services for a long time.  Its longevity in the marketplace is probably one of the reasons, Middlesex can claim a string of successive revenue and earnings increases.  The company achieved a net profit of $16.4 million on $115 million in total sales in the most recently reported twelve months.  More importantly, Middlesex turned 27.7% of those sales into operating cash flow, an achievement that helps support the company’s investment plans and dividend.
Like any other water company Middlesex makes a living delivering water to residential and commercial customers.  They also handle waste water.  The water business requires heavy investment in infrastructure  -  miles of pipes and valves.  Over the last three years Middlesex has invested an average of $21.7 million per year in capital expenditures.  Those water system investments have driven growth by 7.6% annually over the past five years.

Middlesex leadership thinks there is more than water in the company’s future growth.  A frugal operating culture has made it possible to leave an average of $6.0 million per year in free cash flow after covering capital spending.  The company is deploying that capital in industries where its water and flow process knowledge can make a difference  - namely biomass recycling and renewable energy production.

Teaming up with Natural Systems Utilities, a private consulting firm, Middlesex has carved out new niche business, advising waste water treatment plants on energy efficiency.  Its first project is in The Village of Ridgewood, New Jersey.  The waste water treatment plant will divert methane gas emissions into anaerobic digesters rather than burning it off into the atmosphere.  Using a biogas-drive generator, the plant will produce enough electricity to run the entire plant. A net grid agreement with the local electricity generator means the waste water treatment plant can maximize the value of its equipment investment.  Middlesex management sees its new service as a smart way to leverage its expertise without the capital costs usually associated with expansion of its water distribution business.

Apparently, the few analysts who follow Middlesex are not quite on board just yet with the new business plan.  The compound growth rate projected for the company over the next five years is only about 3%, suggesting those analysts who have published estimates for Middlesex see slowing growth in profits for the company.  Still in an industry beset by rising capital and operating costs, slow growth is an achievement.

MSEX shares have appreciated in recent trading sessions, but the stock still offers an attractive dividend yield of 3.7%.  I would wait for a pullback in price to accumulate shares.  That said, a review of recent trading patterns suggests a line of support may have developed in the $20.00 price level.  So it does not seem likely that a major price decline will occur unless macroeconomic or market conditions lead to a correction in equity prices across the board.

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. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.

June 18, 2014

SolarCity Buys Silevo for $200 Million, Plans GW Factory in NY

Meg Cichon

Silevo's Triex Solar Technology
In an effort to further streamline its solar business and lower the overall cost of solar energy, SolarCity (SCTY) announced today that it would acquire high-efficiency cell manufacturer Silevo for $200 million. In an effort to scale up the technology, SolarCity plans to construct a 1-GW manufacturing facility located in Buffalo, New York within the next two years.

The solar leasing company acquired mounting company Zep Solar in late 2013 in an effort to further vertically integrate its business. Now, chairman Elon Musk explained SolarCity’s imminent need for more, and cheaper, solar panel production, which he expects to reach “tens of GW” annually. “We thought that there was a risk of not being able to have the solar panels we need to expand [SolarCity] long-term…[When considering] the rate at which solar power is advancing, the amount of panels that are being made at a large scale today is really not fast enough,” he said during a conference call.

Musk emphasized the need for not only increased panel production, but a focus on advanced panel technology, which is what SolarCity believes that Silveo has to offer. A combination of higher volume and increased efficiency will “have a dramatic impact on solar and in particular be able to have solar power compete on an unsubsidized basis with the fossilized grid,” said Musk. “It is critical that you have high-efficiency solar panels and a total installed cost as low as possible.” 

The Technology

After reviewing dozens of companies, SolarCity ultimately decided to pursue Silevo due to its proven technology and manufacturing success. Silevo uses what it calls “triex” technology to create a crystalline-amorphous hybrid cell, which creates a tunneling oxide and amorphous silicon layer. These layers allow increased temperature tolerance and lead to a high efficiency that currently stands at 21 percent, but SolarCity hopes to reach 24 percent within the next couple of years. The manufacturing process also uses copper electrode metallization rather than silver, which leads to lower costs.

Watch Ucilia Wang discuss Silevo’s technology with then-vice president of business development and marketing Chris Beitel at the 2012 PV America Conference here.

SolarCity co-founder and chief technology officer Peter Rive explained during the conference call that the Silevo technology compares well to standard cells in the 17-18 percent efficiency range and thin film in the 13-14 percent range. While SolarCity’s goal is to eventually reach 24 percent, Rive also noted that 26.4 percent is possible with ground-mounted and tilted flat roof systems due to the technology’s bifacial nature, which means it can absorb sunlight from both sides of the panel.

Rive explained some of the advantages of higher efficiencies with a common residential rooftop system comparison: “Consider a typical 6-kW system with standard efficiency panels and then picture that same system with 24 percent efficiency tri-cell,” he said. “Currently the system requires 24 panels, but the triex-module will require 18 panels. So it requires less labor, less mounting, less wiring, and so on.”

Big Manufacturing Plans 

SolarCity is currently in discussions with the state of New York for its manufacturing facility. According to Rive, its initial target capacity is 1 GW within the next two years, making it one of the single largest solar panel productions in the world, creating thousands of local jobs. Groundbreaking is expected to happen very soon, according to Musk. Silevo currently has a 32-MW factory in China.

When comparing the relative costs of domestic vs overseas manufacturing, said Rive, “we believe that at scale we can achieve a competitive cost domestically as a result of having lower energy costs, avoiding import tariffs, a highly automated manufacturing facility and the fact that the triex cell has less labor content per module due to higher efficiency.”

The Silevo technology can be manufactured with off-the-shelf equipment from the semiconductor and flat-panel display industries and standard wafers, according to Rive. SolarCity also plans to open a research facility in silicon valley to ensure that it meets and even exceeds its efficiency targets.

When all is said and done, SolarCity will be one of the most vertically integrated solar companies in the world, spanning module manufacturing, installation, operations and maintenance, and energy sales. “What I am excited about is when we combine engineers at Silevo, Zep, and SolarCity to tailor manufacturing for all solar panels so they are specifically ready for installation,” said Rive.

Though the company does not have current plans to pursue any of the missing pieces to its vertically integrated puzzle, such as inverters or power optimizers, Musk said that they are open to suggestions and constantly looking to pursue the ultimate goal of the industry — to lower the cost of energy.

“We intend to put a lot of effort R&D on the panel side, into the hardware that we already own, and into inverter and battery technology to provide an overall solution to provide electric power at a price less than fossil fuels that are burdening the grid – that is the key threshold,” said Musk. “The demand grows exponentially as price drops, and it will grow at an enormous pace if we compete with grid electricity with no incentives. That is and has been the goal in order for the world to have sustainable energy."

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.

SolarCity Soars On Silevo Aquisition

Silevo's Triex Solar Technology
By Jeff Siegel


SolarCity Corp. (NASDAQ: SCTY) has signed a deal to acquire Silevo, a solar panel technology and manufacturing company on June 16th.

With Silevo now in the fold, SolarCity is in discussions with the state of New York to build a new manufacturing plant with a targeted capacity in excess of one gigawatt – within two years. Upon completion, this will be one of the largest solar panel production plants in the world.

Although there are plenty of manufacturers in the marketplace today, this exclusive deal gives SolarCity access to a wealth of standardized product at a very attractive cost.

Here's what SolarCity reps had to say. . .

Given that there is excess supplier capacity today, this may seem counter-intuitive to some who follow the solar industry. What we are trying to address is not the lay of the land today, where there are indeed too many suppliers, most of whom are producing relatively low photonic efficiency solar cells at uncompelling costs, but how we see the future developing. Without decisive action to lay the groundwork today, the massive volume of affordable, high efficiency panels needed for unsubsidized solar power to outcompete fossil fuel grid power simply will not be there when it is needed.

SolarCity was founded to accelerate mass adoption of sustainable energy. The sun, that highly convenient and free fusion reactor in the sky, radiates more energy to the Earth in a few hours than the entire human population consumes from all sources in a year. This means that solar panels, paired with batteries to enable power at night, can produce several orders of magnitude more electricity than is consumed by the entirety of human civilization.

Even if the solar industry were only to generate 40 percent of the world’s electricity with photovoltaics by 2040, that would mean installing more than 400 GW of solar capacity per year for the next 25 years. We absolutely believe that solar power can and will become the world’s predominant source of energy within our lifetimes, but there are obviously a lot of panels that have to be manufactured and installed in order for that to happen. The plans we are announcing today, while substantial compared to current industry, are small in that context.

Clearly, the market was pleased with SolarCity's announcement. The stock soared more than six percent in morning trading. Of course, the stock is also down considerably from its March, 2014 high of more than $77.

I actually commented on this about a month ago, noting that it was time to buy shares. I remain bullish on SolarCity and continue to stand by my one-year price target of $85.


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

June 17, 2014

The EPA's Carbon Rule: Likely Stockmarket Winners

By Harris Roen

Greenhouse gas emissions by economic sector
  A seismic shift in the power generation landscape is starting to sink in. It has been two weeks since the EPA announced its new proposed carbon rules, one of the flagship efforts of the Obama Administration to address climate change. This shift is meant to move the country in the direction of inevitable changes coming to the energy economy. It is important for investors to know which companies and sectors stand to benefit from the new rule.

What the rule says

The basics of the proposed rule are this: States need to come up with ways to reduce power plant emissions. The goal is to allow flexibility to States so that they can implement innovative strategies to reduce the “pollution-to-power ratio” of fossil-fuel fired power plants. The EPA believes that by doing so, U.S. power plants should emit 30% less carbon in 2030 than they did in 2005.

The EPA is framing the effort with four “building blocks” in order to reach carbon reduction goals. These are:

1. Improved operations at power plants.
This means building more efficient plants, or retrofitting existing ones.
2. Substituting high carbon generating plants with lower carbon generation.
In effect, replace coal-fired plants with natural gas.
3. Substituting fossil fuel plants with low and zero carbon generation.
A call to enhanced deployment of renewables.
4. Increase demand side efficiency.
Lower the energy use of homeowners, businesses, etc.

All four of these building blocks have strong implications for alternative energy investors. They are listed below in order of relevance to the companies we track here at the Roen Financial Report.

Substituting fossil fuel plants with low and zero carbon generation

This building block is at the heart of the mission of the Roen Financial Report, moving beyond fossil fuels and into the realm of renewables. These two very different companies are among my top picks to benefit in this category.

SolarCity Corp (SCTY) is an innovative, full service solar installation company that has had more digital ink spilled about it than most any other alternative energy company (including my own analysis). SolarCity takes the residential and commercial customers through design, installation and financing of solar systems. In addition to solar installs, SolarCity does home energy evaluation, energy efficiency upgrades, electric vehicle charging and energy storage. Growth has been outstanding for this company, and though it is a speculative investment, I have no doubt it will become profitable in the new two to three years.

Trina Solar Limited (ADR) (TSL) is a China-based integrated photovoltaic module manufacturer. It has a large production capacity and a global distribution network covering Europe, North America and Asia. Its sales have picked up since 2012, and Trina has posted positive earnings in its three most recent quarters. Trina Solar recently closed on $150 million of convertible senior notes and over $90 million of American Depositary shares. I see the fact that the company is looking to western capital and away from Chinese government loans as a positive sign.

Increase demand side efficiency

Efficiency is one of our favorite investment themes. This is low hanging fruit – it benefits end homes and businesses by saving money, it benefits utilities by reducing the need to build more capacity, and it benefits the environment. The three companies below are well positioned leaders in this category

EnerNOC, Inc (ENOC) helps commercial and industrial users reduce electricity use during peak demand, which can significantly reduce a company’s energy consumption. EnerNOC’s services include demand response, energy efficiency, energy procurement, emissions tracking and trading support. This Boston-based company recently won an auction for over $185 million in capacity payment in the PJM Interconnection capacity market for 2017/2018, which should bode well for its bottom line. ENOC is up 41% for the year, and over 220% from its lows in 2012.

Tetra Tech, Inc (TTEK) is a diversified company that provides environmental services, energy efficiency consulting, carbon management and other services. This large California-based company works on projects world-wide and brings in almost $2 billion in revenues annually. TTEK has been a component of the Paradigm Portfolio since its inception. We consider Tetra Tech to be trading below fair value at current levels in the mid-$20 range.

Ameresco Inc (AMRC) is a small Massachusetts-based company that provides a variety of measures to improve the efficiency of major building systems. These include heating, ventilation, air conditioning and lighting. Ameresco also installs small-scale renewable energy plants. AMRC had a solid vote of confidence by management, as CEO George P. Sakellaris recently purchased 85,000 shares in a month worth over half a million dollars. This positive insider trading activity brings his direct ownership to over $18 million.

Substituting high carbon generating plants with lower carbon generation

The case is now clearer than ever that coal will be phased out in favor of natural gas. Though substituting one fossil fuel for another may not be the ultimate solution to solving our climate problems, it is undoubtedly a critical short-term step to addressing base-load needs while reducing carbon emissions. Three companies have been selected which stand to benefit from this trend.

NextEra Energy, Inc (NEE) is a large, profitable Florida-based power company that generates more than half its power from natural gas. NextEra is in the process of completing a major development cycle where it is modernizing older, less-efficient fossil generation facilities and building more efficient, cleaner natural gas-fueled plants. For example, its Port Everglades plant was demolished in 2013 to be replaced with plant that should have half the emissions. Also, NextEra is developing a new natural gas pipeline to Florida targeted for completion in 2017. In addition, NEE generates 8,000 megawatts of electricity from renewable resources.

As a utility NextEra offers steady stock price growth with an attractive yield. With over 4.5 million customer accounts, NextEra Energy is well over the industry average in assets and earnings growth. We consider NEE to be above fair value at current levels, but it remains a good long-term investment.

Sempra Energy (SRE) Sempra Energy is a holding company that owns two southern California utilities, as well as energy assets in other parts of the United States, Mexico, and South America. This San Diego based company has over 17,000 employees and provides products and services to more than 31 million consumers worldwide. Sempra has a strong portfolio of natural gas pipelines, storage and generation facilities. As with NextEra, Sempra also has an array of solar and wind facilities that it manages. Sempra has had steady sales and strong earnings, but has a relatively high PE. It is deemed to be just above fair value, so is a good buy in the $85-$90 price range.

GreenHunter Energy, Inc (GRH) provides water management solutions for shale gas focusing on serving companies in the Marcellus, Eagle Ford and Bakken shale plays. Its services are essential to address environmental issues concerning hydraulic fracturing, or fracking, utilized in shale gas production. Though this microcap penny stock had a sketchy beginning, it has enjoyed a recent jump in its stock price due to increasing revenues leading to decreasing losses. Its earnings are still negative, though, so we consider this micro-cap to be a speculative investment.

Improved operations at power plants

Though many people may not consider it a renewable energy company, General Electric (GE) is a key player in many aspects of the energy industry. As a leader in power plant design and turbine development, GE will surely benefit from planned power plant retrofits and reconfigurations.

Sales and earnings for GE have been flat since the beginning of the decade, but it has had climbing dividends every year since 2010. Though we see GE as overvalued at current levels, this company can be a stable large-cap component of a balance portfolio. We estimate fair value to be in the low 20’s, so accumulate on the dips.


The Obama administration made a bold move to address climate change by issuing these carbon rules through the EPA. While the proposed regulations are still in a draft phase, there is no doubt that the changes already occurring in the utility business will continue. Savvy investors well positioned in the proper companies and industries will be sure to benefit from this continued energy transformation.


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

About the author

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

June 16, 2014

Tall Neighbor Coming to Arizona Desert Community

by Debra Fiakas CFA

The citizens of a San Luis, Arizona are about to get a new, very tall neighbor.  Solar Wind Energy, Inc. (SWET:  OTCQB; formerly Clean Wind Energy Tower) recently secured 600 acres in the area to build a solar wind tower.  This is a unique design that takes advantage of air heated by the sun’s power utilizes.  Fast cooling of the air creates a powerful downdraft that drives turbines at the chimney base.  Solar Wind expects the generators attached to its turbines to produce up to 1,250 megawatts of electricity that can be sold to residential and business customers in Arizona.

Solar Wind Tower Illustration
Few investors have probably heard of solar wind towers.  They are not commonplace, but the San Luis tower will not be the first.  A small-scale experimental model of a solar draft tower was built near Manzanares, Ciudad Real, near Madrid, Spain.  The demonstration operated successfully for eight years before it was decommissioned.  Another tower went into commercial operation in 2010 in Inner Mongolia, China and now produces 200 kilowatts.

Solar towers or chimneys as some call them are low-tech.  The power conversion rate is much lower than other solar thermal designs, such as the solar collectors now operating in California and other areas.  However, low cost per solar collector area helps offset the low conversion rate.
The solar collectors in California and elsewhere have drawn some criticism.  I wrote about Brightsource Energy and its Ivanpah solar thermal power plant in the Mojave Desert in the February 21, 2014 post “The Spaniards are Coming.”  Besides the water requirement to keep solar collectors clean, critics are concerned about heat rising out of the structure as well as the land requirement.  Solar wind towers deserve the same scrutiny.  However, the conclusions might be different. 

First, in the solar wind tower cooled air is directed downward to the turbines, not upward and into the open air.  Second, the land requirement is nominal.  The San Luis structure is to be located on 600 acres, just a smidge under one square mile.  This is about the same area required by a typical coal-fired power plant.  Keep in mind that the power plant itself is not the only land requirement for conventional coal-fired electricity.  Do not forget the many acres of land churned up by the coal mine, without which there would be not so much as a kilowatt coming out of the coal-fired power plant.

 The real concern for Solar Wind Energy’s design is the water requirement.  Pumps deliver water to an injection system at the top of the tower so that a mist can be blown across the tower opening.  The water evaporates into air heated by solar rays.  The air becomes cooler, denser and heavier than the outside warmer air, and falls through the cylinder at speeds up to and in excess of 50 miles per hour.  The company is silent on the amount of water required to operate its solar wind tower,   so this is where things get murky for Solar Wind Energy’s environmental reputation.

For a community in the Arizona desert, it seems the water needs of this new neighbor would be a concern.  The City Council of San Luis unanimously approved the project in April this year.  What is more they guaranteed a water supply for the first fifty years of operation.

The good citizens of San Luis are not the only ones who have stepped forward with support for Solar Wind Energy’s plans.  National Standard Finance has entered into a joint venture with Solar Wind Energy for the San Luis project, which is expected to require as much as $1.8 billion in capital to complete.

The San Luis project is currently slated to take four years to build.  Besides overseeing the engineering design and construction activities, Solar Wind Energy is actively seeking licensees in other countries.  The company recently entered into a memorandum of understanding with a private concern called Invest Africa, Inc., which will represent the technology in Namibia and Botswana.

If the San Luis project impresses investors, it has yet to show up in the company’s stock price.  SWET trades at just two pennies per share.  The company has over 500 million shares outstanding, giving it a market capitalization of $9.6 million.  With trading volume over two million shares per day, the stock appears to be the target of penny stock traders taking advantage of small up and down movements in stock price.  Thus the stock is more like a lottery ticket than an 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. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.

June 15, 2014

RGS Energy: Tempered, Opportunistic Growth

Garvin Jabusch

Kam Mofid has a more long-term vision than most CEOs. His emphasis on the next earnings per share (EPS) report and his obsession with short-term focus are minimal relative to America's typical boss. He's not primarily managing to the next quarter.

His company, RGS Energy (ticker symbol: RGSE), is a solar-module installer, mainly in the residential vertical. RGSE doesn't directly compete with most solar panel manufacturers. Instead, it provides residential rooftop installation distribution for them. It then captures lease payments and revenues from selling excess electrical generation to the grid (in states that allow it). Whereas First Solar (FSLR), Canadian Solar (CSIQ), and Sun Edison (SUNE) are primarily engaged in module manufacturing and commercial and utility-scale installations (although not exclusively -- this is a fast-evolving area), RGS Energy and its larger competitor SolarCity (SCTY) are all about home/residential installations. For now, only three residential installation players have national reach: SCTY, RGSE, and Vivint, Inc. (Vivint is privately held and not discussed here).

RGS Energy Logo

RGS Energy was once the idealistic brainchild of green-oriented consumer -goods firm Gaiam, Inc. (GAIA), and was then known as Real Goods Solar. Mofid joined in 2012, soon after RGSE was spun off from its parent, and quickly moved to modify the makeup of the board, diversify the shareholder base, and "move away from the hippie business mentality," bringing on a number of individuals with practical experience and track records of delivering successful businesses.

Pragmatically, RGS Energy didn't become a true competitor to SolarCity until Mofid joined the company. Not that Kam Mofid and his team are necessarily trying to catch SolarCity in terms of scale or market share. They believe their industry's growth potential will generate enough market share to go around. In Mofid's words, "there's plenty of work to do." Since residential installations don't require any new land development, rooftops are effectively brownfields, and as such represent a great low-impact source of electricity. And Mofid sees many greenfield opportunities in those brownfields.

Whether via smart strategy or just good timing, Mofid and his team have had benefitted from observing SCTY's successes and encounters with pitfalls. SCTY in many ways has paved the way in the residential installation business, and RGSE has had a bird's eye view of the process -- stumbles and all.

As a result, RGSE has chosen not to directly emulate SCTY. In Mofid's opinion, that company is taking on inappropriately high risk. In particular, Mofid thinks SolarCity is banking too heavily on its retained-value-model and being too aggressive in terms of assumed value of solar modules after 20 years of depreciation and continuing technological innovation. Learning from SCTY's success and risks with this model, RGSE will soon no longer rely on tax-equity concepts, reflecting a belief that retained value made sense in the past but no longer applies in "2014 thinking." Already, RGSE has incorporated lower tax value into its growth model as a risk control.

Mofid is not as sanguine as SCTY is about the retained-value-model of valuing solar panels. He also believes that SolarCity is in general too aggressive and too eager for risk -- not only in poor potential realization of retained value of installations but also, and perhaps more importantly, in the "deteriorating policy and subsidy environment in the U.S.," and on a state by state basis.

In any fast-growing industry where the name of the game is to capture as much emerging territory as possible, it's always a struggle to manage between top line growth vs. EPS. Here, RGSE, like SCTY, has chosen to invest in growth at the expense of current EPS, but in a more conservative way than SCTY. As Mofid says, "meaningful GAAP revenue is possible soon with our model."

There is not yet a clear winner between the more and the less aggressive strategies, not that there needs to be. That two of the three largest solar installer companies in the U.S., SCTY and (the much smaller) RGSE, each employ one of these approaches means that a public equity investor can get exposure to both and not have to choose between methods. This is fortunate, because it's possible that both the rapid and the measured growth strategies could turn out to be winners. We like both the high-growth SCTY and the measured-growth RGSE, as each brings interesting and potentially valuable characteristics. Another benefit of investing in both approaches: Not only do RGSE and SCTY employ different approaches to managing growth but they also don't operate in many of the same states. However, for investors who find SCTY's all-out-for-growth approach too aggressive, RGSE may represent a more temperate alternative.

The residential installation market is new and growing fast, so larger players with more access to capital have a major advantage over smaller, locally based firms, both in ability to leverage pricing, engage more projects, and have the flexibility to emphasize growth in states with the most favorable conditions for the solar installation business. This last point is more important than it may seem: Many areas, under the sway of the local public utility commission and the monopoly or near-monopoly of electric utilities, can, or have, or may at some point attempt to stall growth in solar with policies unfavorable to the industry. A national model diversifies and mitigates this risk. Ultimately, as renewable energies cause overall electricity prices to fall, sentiment will cause states and utilities to relent, which will ultimately help solar and wind all along their value chains, but until then, geographic diversity is going to be key. RGSE currently operates in 16 states.

Mofid has a goal of becoming and remaining at least the third-largest installer nationally. His understanding of the scope and depth of the solar installation market in the U.S. shows strongly here: He is content to capture 1/10th of that rapidly growing business.

So RGSE is now beginning to take steps to accelerate growth. Primarily, this is taking the form of a financing joint venture called RGS Energy Asset Management, owned with Altus Power America Management. Goldman Sachs (GS) has agreed to provide capital access for the JV, but Mofid didn't address the terms or scale of its involvement. (Goldman evidently likes installation diversification as much as we do: They are also major capital providers to SCTY.)

RGSE has a couple of other sources of and access to capital. First, the firm currently has no long-term debt, only a revolving line of credit with Silicon Valley Bank that it pays down to zero at the end of each quarter. Long-term debt financing does appear to be in the cards going forward, though. As Mofid says, with respect to expansion, "there will be a debt aspect". Second, they have a $200 million mixed shelf filing reserved to fire growth (acquisitions and capital) when they perceive an opportunity.

Near-term, Mofid feels the industry has now and will continue to have access to state and federal incentives at least until 2016. After that, incentives most likely won't go away, but may drop by some meaningful percentage. So Mofid projects the solar installation industry will have record growth through 2016, then slow a bit, which concurs with our own view of the situation.

When asked what RGSE's key risks involve, Mofid gets more macro. Utilities present a patchwork, he says: "some good, some quite bad" (he says RGSE's home state of Colorado, for example, is currently a tough environment), so, again, a national model is key to offset that risk. As a result, the residential installation industry will likely experience both consolidation and failures of local installer firms, providing growth-by-acquisition opportunities for all three major, multistate players.

Regarding tariff risk involved with buying modules from Chinese manufacturers, Mofid sees the additional costs as "very low" relative to his business at $0.02 to $0.05 per watt (I note here that this actually presents meaningful inflation for utility scale plant developers that depend on Chinese prices, but that's a different discussion). Moreover, RGSE buys from multiple panel manufacturers, and most of these are positioning themselves to make and ship from plants outside of China (via possible additional manufacturing capacity in Mexico, for instance).

Manageable as Mofid sees them for now, there are definite political risks involved with being a solar installation business in the U.S., including states' regulations, utilities' intransigence, and national tariffs. Investors should consider their view of national and local policymaker sentiment toward renewables when assessing risks associated with an investment.

And perhaps those risks explain RGSE's recent lackluster share performance and high short interest of late. On the latter, RGSE has recently hired a professional short interest monitoring service to report violations of shorting rules (such as naked short selling) to FINRA. This may have the effect of dissuading unscrupulous shorters, but I doubt it. I'd rather see RGSE spend capital growing, and silence the critics that way.

There's also been bad press regarding RGSE's recent Hawaiian acquisition, Sunetric. And not without reason -- Hawaii presents other risks and opportunities. The business pipeline there is mostly comprised of commercial demand, so residential firms may face declining business and ultimately attrition, potentially including RGSE. But this may also mean larger firms with geographic diversity away from the islands and some staying power may be able to consolidate market share. It's too soon to tell.

That said, the Hawaii deal reveals some RGSE strengths. Mofid and team were willing and able to move nimbly from a cash/equity deal to an all-equity deal as the situation with Sunetric evolved. The Sunetric acquisition is interesting for another reason. Mofid says RGSE is, again, like SCTY, becoming active in the solar-to-storage space, and he thinks they can use isolated, contained-grid environment and expensive-utility bill center Hawaii as an ideal proving ground for perfecting a business model that can work. And the two residential installation firms aren't the only ones who think the panel-to-storage model will work. As Barron's recently reported, "Barclays this week downgrades the entire electric sector of the U.S. high-grade corporate bond market to underweight, saying it sees long-term challenges to electric utilities from solar energy… and recommends investors who can do so should underweight the electric sector versus the broader U.S. Corporate index, and rotate out of bonds issued by utilities in areas 'where solar + storage is closer to competitiveness.'" RGSE is looking at both Hawaii and California markets for the solar+storage model, and they will look to "innovate into those services as technology comes on line."

SCTY has a major advantage over RGSE in the storage race due to its sisterhood with Tesla Motors (TSLA) and its forthcoming Gigafactories, which may produce high-quality batteries for as little as 60 percent of the cost of other manufacturers. But this doesn't mean RGSE can't make significant progress with the same model, especially in states where SCTY is not present.

Similarly, RGSE plans to keep expanding within its existing markets. Where there is no strong local player, RGSE can establish its brand and presence de novo; where there is a local brand that is already valued by the community, there could be opportunities to acquire installers with their infrastructure, employees, trucks, and sales pipelines. Mofid mentioned twice that the residential solar installation space is still in its "constantly evolving," "Wild West" stage, and that keeping a war chest (no debt yet, shelf filing) ready for his "best opportunities" is his approach. It's hard to disagree with this, and yet we can't help but wonder whether he shouldn't be deploying his war chest a little faster; sometimes the largest risk is the one you don't take, and residential solar installation won't be an immature market forever.

When we asked whether sitting on the "war chest" of unused shelf offering and zero debt is itself a risk, Mofid sidestepped. While he did affirm their forward guidance, he gave little insight on a concrete path toward achieving this guidance, offering only, "we're gonna keep doing what we're doing." What we can glean from regulatory filings and conference call transcripts reveals only a bit more clarity. Important components for RGSE's roadmap include establishing new funding vehicles for project financing (that may or may not be part of the current JV), which must be an essential aspect of the plan to move away from relying on tax equity in financing and bankrolling ongoing business operations.

Mofid clearly passionately feels that the industry is compressing, and small installers will be pushed out, leaving space for companies like RGSE to move in with their larger bankrolls and resources to capitalize on the vacuum. For now, RGSE is estimating 50-55MW installed capacity in 2014, but it's not clear if this includes the acquisition of smaller private solar firms.

In any event, "what we're doing," for now, also seems to include expanding installation capacity via acquisitions. The last four of the company's buys were paid for primarily with RGSE shares; so far, Mofid seems to be taking a bet on dilution over debt. And it appears that RGSE is about as petal-to-the-metal as it can realistically be at this point: Mofid noted that the company's final acquisition in 2013 slowed its plans down significantly as it dragged on through the first quarter of 2014. It seems that RGSE has capacity to take deals one at a time, but not faster. And evidently, this suits their temperate growth model fine.

We asked Mofid if the confluence of new efforts to grow, emphasizing states where SCTY is not already present, and having not yet taken on any debt means RGSE is beginning to position itself as a possible acquisition target. Mofid says they have no current focus on becoming part of a larger peer such as SCTY or any other potential bidder. Further, since Mofid claims "there will be a debt aspect to our growth plan," it seems the zero debt balance sheet will at some point give way to the desire to expand. Still, while not currently courting suitors, Mofid admits that "everything is for sale."

Between now and 2016, both SCTY and RGSE are likely to accumulate small local installers within a chaotic environment of consolidation, regulatory changes and price fluctuations. It may well be that some panel manufacturers and utility-scale players such as SunEdison (SUNE) and SunPower (SPWR) are waiting for the residential space to sort itself out before deciding to make offers for firms like RGSE, which could then act as verticals to get their panels into the U.S. residential market.

Acquisition target or not, we see no reason why RGSE should not realize market capitalization growth to about eight to 10 percent of that of SCTY. As of the time of this writing, that implies a 300 to 400 percent upside for the stock, not counting 2015/2016 growth. Thus, we feel comfortable placing a $10.00 2015 price target on RGSE. And considering the rapid growth of the industry, higher valuations than that going forward from there are Mofid's to lose.

Background notes on Kam Mofid:

  • Canadian-born, from the Niagara Falls area
  • Undergraduate degree from University of Waterloo
  • Was a fellow at GM Canada, sent to
  • Georgia Tech for his masters
  • Strong engineering and primarily automotive background
  • 29 year old exec at UTC
  • First non-founding president at REC Solar
  • In 2011, brought over to MEMC (SUNE), just in time for the solar market crash
  • In July 2012, RGSE called Kam with CEO opportunity
  • RGSE at that time was controlled by GIAM, and had very low trading volume. Mofid turned over the board and diversified the shareholder base, now 17% owned by a Boston PE firm via several rounds of share issuance
  • He hasn't sold a single share of his holdings yet
  • Has little professed regard for analyst/commentators who write negative things about companies he leads -- he feels most focus too much on short-term results at the expense of long-term shareholder benefits

RGSE Suppliers:

  • Panels: CSIQ, STP, and several others. RGSE does not utilize long-term purchase requirements
  • Inverters: Fronius and several others (no share with question)
  • Racking: Uni-rack

– HQ Visit, May 22, 2014

Jeremy Deems, Robert Muir and Jake Raden contributed research for this post.

Disclosure: Green Alpha® Advisors has current positions in RGSE, SCTY, SPWR, FSLR, CSIQ, SUNE, and TSLA. Green Alpha has no holdings in or near-term intention to buy any other company mentioned in this post.

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

June 10, 2014

Force in Name Only

by Debra Fiakas CFA

One of the companies in our novel alternative energy indices is Forcefield Energy, Inc.  (FNRG:  Nasdaq).  For a time it was listed as among alternative chemical products and now is included among waste-to-energy developers, but it could be as easily included in our data base among sellers of LED lighting products.  The identify confusion is due in part to Forcefield’s own description, which includes a laundry list of capabilities and technologies.

The company lays claim to proprietary products for heat recovery and the conversion of waste heat to useful purpose.  Forcefield comes by this capability though a 50.3% interest in TransPacific Energy based in the U.S. Forcefield is also a distributor of LED lighting from LightSky, a China-based LED manufacturer.  Another China-based subsidiary is involved in the production of trichlorosilane, a chemical that is used in the production of polysilicon for photovoltaic cells.  That subsidiary was sold in February 2014.

Forcefield management describes the company as “a new force in the field of energy.”  Certainly with all these energy-related interests it seems formidable, at least until an investor looks at the company’s financial performance.  With the chemicals business out the door, revenue has been shrunk down to just $295,250 in the most recently reported twelve months and the company lost a net $2.1 million.  In the same period Forcefield burned up $3.8 million in cash to support operations.

FNRG shares are now trading at a multiple of 290 times sales  -  a valuation which is probably not sustainable.  Forcefield management has a challenge before it.  It is understandable, in the interests of building a ‘clean, green’ business model, why management would divest of a messy chemical operation.  However, neither its waste-to-energy business nor the LED lighting sales are sufficient to make up for the chemicals revenue.  New strategic relationships hold considerable promise, but none have delivered significant new revenue.

Forcefield Energy made an appearance at the Marcum Micro-cap Conference in New York two weeks ago.  It is well that management is making an attempt to bring investors up to date on the strategic changes in the company’s business model.  Management was to win new shareholders, but it might be premature to take a position in stock sitting well above its sales value.

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.

June 09, 2014

Ming Yang To Build 300 GW Chinese Wind Farm

Doug Young

Wind power company Ming Yang (NYSE: MY) became China’s latest new energy equipment maker to dip its toe into project finance and development last week, when it announced a new plan for a massive wind farm project in Jiangsu province. Its announcement follows similar moves by many of its peers from the solar sector, and comes as Beijing embarks on a broader plan to clean up China’s air through initiatives like clean energy development.

Plans like Ming Yang’s will certainly help China to meet its ambitious goals; but they also carry a huge burden and risk for new energy equipment makers whose own financial position is already quite tenuous as their sector emerges from a 3 year downturn. To promote healthier development, Beijing should actively encourage big state-owned companies to finance and build the dozens or even hundreds of new solar and wind farms that will be needed to help the country meet its goals.

Beijing has set an ambitious target of building 35 gigawatts of new energy power capacity by the end of next year, with Chinese firms expected to supply the big majority of wind and solar equipment needed to meet the target. The plan is designed not only to lower China’s reliance on dirtier fossil fuels, but is also aimed at promoting a battered field of new energy equipment makers that are only now emerging from a prolonged sector downturn.

Ming Yang is one of the country’s leading wind power equipment makers, and was in the headlines last week when it announced it will build new wind farms with a massive 300 gigawatts of capacity in eastern Jiangsu province. (company announcement) Ming Yang said it received approval for the project from the energy bureau in the coastal city of Rudong, and the company itself would build and operate the massive project.

Ming Yang’s plan is just the latest that is seeing new energy equipment giants like Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) also embark on similar construction. Yingli announced in April that it would set up a 1 billion yuan ($160 million) fund with a Chinese private equity partner to build new solar plants, with Yingli supplying most of the solar cells for new construction.

Canadian Solar has also been a longtime user of the business model, which sees equipment makers build plants using their own funds, and then sell them to longer term investors after completion. Such a model is somewhat logical, as it puts project development in the hands of companies that understand the business and therefore can build plants with the biggest chances of success. Such a strategy also gives equipment makers an important sales outlet for their products.

But the business model also carries big risks for the equipment makers, who must shoulder big financial burdens for the 1-3 years required for development of new plants that can cost tens of millions of dollars. Such self-financing of new projects was partly to blame for the collapse of former industry leader Suntech, which ultimately went bankrupt. Like Suntech, most of China’s new energy equipment makers have huge debt burdens after posting losses for most of the last 3 years, and already have difficulty finding money just to support their day-to-day operations.

The financial challenges they face have been on display in the last 6 weeks, when first Yingli and then Trina Solar issued new shares to raise cash, and then saw their stocks tumble due to investor skepticism. Yingli ultimately had to sell its new shares at a 20 percent discount to their price before its announcement, while Trina offered a 15 percent discount.

A handful of major cash-rich state-owned companies have stepped forward to finance new plant construction, with names like Zhenfa New Energy and 3 Gorges New Energy announcing projects this year. Aviation Industry Corp of China was also in the headlines last month when it announced an ambitious plan to develop its solar power expertise by helping to build and fund 300 megawatts worth of solar power plants in Britain.

Beijing should encourage more of these big state-owned companies to engage in similar domestic plant construction by offering more preferential policies and also by helping to educate the companies about the fundamentals of developing economically viable projects. Doing so will remove the burden of new plant construction from the equipment makers, allowing them to focus their energies on rebuilding their financial positions and improving their products.

Bottom line: Beijing should work harder to cultivate a new generation of new energy power plant builders to help meet its ambitions construction plans.

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.

June 07, 2014

Trina Joins Solar Fund Raising Queue

by Doug Young

Just a day after the solar panel sector was hit by a new negative trade ruling from the US, Trina Solar (NYSE: TSL) gave its investors another unwanted surprise with word that it is preparing to raise more than $200 million through a combination of new stock and bond offerings. Trina joins a growing list of solar panel makers that are looking to western capital markets as confidence returns to the sector following a prolonged downturn dating back to early 2011.

The fact that Trina and others are turning to western capital markets to obtain funding is probably a good sign overall, as it means these companies are healthy enough to raise their own money rather than relying on handouts from Beijing. But western investors are showing such money won’t come cheap, with Trina’s shares tumbling after it announced its plan.

In fact, shares of all the solar panel makers fell in the latest trading session on Wall Street, after a ruling from Washington laid the groundwork for new punitive tariffs on Chinese panels. (previous post) Shares of Trina, as well as Yingli Solar (NYSE: YGE), ReneSola (NYSE: SOL) and Canadian Solar (Nasdaq: CSIQ) were all down 4-6 percent in the trading session after the news.

But Trina shares fell another 4 percent in after hours trade after it announced its newest fund raising plan, meaning the company has lost nearly 10 percent of its value in the last 24 hours. Trina actually issued 2 separate announcements, starting with one detailing plans to issue $150 million in convertible bonds. (company announcement) That was followed by another announcement that it would issue 8.8 million new American Depositary Shares (ADSs). (company announcement)

Based on Trina’s latest closing price before the 2 announcements, the company could raise around $100 million from the share offering, bringing its total fund raising to around $250 million through the 2 different plans. There’s nothing else of major interest in the announcements, though Trina did say it could raise up to an additional $40 million if overallotments for the 2 plans are exercised.

Trina’s plan makes it the latest of China’s major solar panel makers to tap western capital markets for much-needed new funding. Last month Yingli raised a more modest $83 million through the issue of new shares. (previous post) But the company ultimately had to sell the shares for 20 percent less than its stock price before it announced the deal, reflecting the skepticism many western investors still feel towards solar panel makers. Canadian Solar has also raised $200 million through its own offerings of new stock and debt.

As I’ve said above, one could interpret these latest plans as a positive development because they signal a level of confidence that the companies feel about their near- to mid-term prospects. But growing protectionist sentiment in some of the world’s major markets makes these companies’ prospects look shaky at best.

The US ruling this week is just the latest in a growing series of protectionist moves against solar panel makers. China responded to earlier US tariffs with retaliatory moves against American makers of polysilicon, the main ingredient used in solar panel production. India has also taken its own recent protectionist moves, and Japan is taking similar though less obvious moves by refusing to finance projects that use non-Japanese solar cells.

Shares of the solar panel makers all staged a huge rally last year, as companies finally returned to profitability and signs emerged that the trade wars could be easing. But many shares have begun to retreat this year, and more downside is likely ahead if companies start to report they are feeling effects of all the protectionist moves happening in the market.

Bottom line: Trina’s new fund-raising plan is the latest sign of growing confidence in the recovering sector, but a fresh series of protectionist moves could put a damper on the turnaround.

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.

June 06, 2014

US Geothermal: Egregiously Undervalued?

by Debra Fiakas CFA

Last week US Geothermal (HTM:  AMEX), a power generator from geothermal projects in California, Oregon, Nevada and Idaho, made an appearance at the Marcum Microcap Conference in New York City.  The company stood out among most of the companies appearing in Marcum’s so-called ‘energy track’ as one of the few with solid revenue and profits.  US Geothermal reported a net profit of $1.9 million on $28.8 million in total sales in the twelve months ending March 2014.  The net profit is commendable, but what I find more interesting is the conversion of 30% of sales to operating cash flow of $11.4 million.

San Emidio
US Geothermal's San Emidio power plant in Nevada
The ability to generate cash flow is vital for a growing company like US Geothermal.  Over the last three years the company has spent an average of $16.5 million annually on capital investments.  The company has also been acquisitive.  Most recently the company bought the Ram Geysers project in Sonoma County, California for $6.4 million in cash.  Ram Geysers has five completed wells available for immediate production near 30 megawatts of total steam assuming 25% of the geothermal liquid is re-injected back into the reservoir.

US Geothermal management thinks they got quite a bargain in the Ram Geyser’s deal.  The Ram Power subsidiaries had already invested over $90 million in the project, implying that US Geothermal paid seven cents on the dollar for the capital investment value.  Once the company’s development plans have been carried out it seems likely the Ram Geyser’s will make a strong contribution to return on assets

At the end of March 2014, US Geothermal reported a total of $204.5 million in tangible assets or $1.97 per share of which $0.38 is in the forms of cash and financial assets.  It is instructive to compare tangible assets per share to the company’s share price of $0.65.  Trading at 33% of tangible asset value suggests investors have little confidence in the long-term potential of these geothermal assets.  Alternatively, investors might be simply concerned about the required investment for the projects the company currently has under development in Guatemala and Nevada.  The company current estimates a capital cost near $195 million.
The current price for HTM could also represent an egregiously undervalued situation if US Geothermal’s assets prove out.  So I will continue to follow the company’s progress and view the stock at the current price level as an option on full operation of all assets.

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 t

Mantra's Promise of Innovation

by Debra Fiakas CFA

How often do we see the crowd rooting for the underdog?  You could hear the cheers for Mantra Energy (MVTG:  OTC) last week at the Marcum Microcap Conference in New York City.  Mantra is a developmental stage company pursuing technologies to harness carbon dioxide for energy.  Of course, the company has no revenue and therefore no earnings.  Indeed, its technologies are so unique and as yet at such an early stage some might find them almost fanciful.   Yet for some investors, a fanciful underdog is even better than another.  

Mantra sees itself as a technology incubator, building on intellectual properties the company bought from the University of British Columbia.  The company is perfecting what they call the electro-reduction of carbon dioxide.  The idea is to use electrochemistry to convert carbon dioxide to usable products such as formic acid.  A wide range of end products depend on formic acid, such as preservatives and antibacterial agents in livestock feed and materials for de-icing runways.  Another important product might be formate salts, which are increasingly being considered as chemical carriers in hydrogen storage and transportation.

Turning a waste from industrial processes  -  a nasty one at that with far reaching climatic impact  -  into a useable product could have very impressive economic attributes.  The cost of carbon dioxide capture could be partially or fully covered by sales of the commercially viable products.  Mantra management believes the economics of its carbon capture and recycling solution attractive.

At least one company has already been convinced.  Lafarge Canada (LFRGY:  OTC) has agreed to work with Mantra with a pilot project at Lafarge’s cement plant in Richmond, British Columbia.  The pilot plant will have the capacity to convert 100 kilograms of carbon dioxide per day to formate salts.

Also under development is what Mantra calls its Mixed-Reactant Fuel Cell (MRFC).  In conventional fuel cells it is necessary to incorporate expensive membranes in the design prevent the fuel and oxidant from mixing.  In Mantra’s fuel cell the fuel and oxidant are allowed to mix, eliminating the cost and weight of membranes.  A variety of fuels can be used, including the formic acid that Mantra hopes to produce from its carbon capture and recycling technology.  Manta does not expect its fuel cell to have as much efficiency a conventional fuel cells, but the MRFCs are expected to have higher volumetric power densities.

Mantra has many steps to complete before reaching revenue stage.  Even more time will probably be needed to reach profitability and positive cash flow.  Before then the stock will trade on investor’s willingness to back an underdog if not confidence in management’s ability to execute on its strategic plans.  The company recently received a vote of confidence from a group of investors who infused $1.7 million in new capital into the company.  The company is using the money to take care of a few outstanding obligations and begin assembling the pilot plant.

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.

June 05, 2014

Alternative Energy Mutual Funds and ETFs Returns Flatten

By Harris Roen

Alternative Energy Mutual Fund Returns


Alternative energy mutual funds have given back some of the gains they have enjoyed since the beginning of the year, though they are still up almost 20% on average. All MFs are in positive territory, with annual returns ranging from 9.8% to 40.9%. MFs are also up nicely for the week and month, but on average are down slightly in the past three months.

These returns are very different than those of just five months ago, when alternative energy MFs were doing almost twice as well… 

Alternative Energy ETF Returns


Alternative energy Exchange Traded Funds are up 25.7% for the year on average, with all except one posting gains. Solar ETF Guggenheim Solar (TAN) has the greatest gains, up 63.1% in 12 months. Market Vectors Rare Earth/Strategic Metals (REMX) is still down for the year, off 20.1%.

Quarterly returns are much more mixed, with only 5 out of 17 ETFs up in the past three months. The largest three month loser is iPath Global Carbon ETN (GRN), down 27.9%.


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

About the author

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

June 04, 2014

US Closes Solar Tariff Loophole

Doug Young


In a move that should surprise no one, the US has announced it will levy new punitive tariffs on China-made solar panels to close a loophole from an earlier ruling. This move won’t help anyone and could seriously stifle the industry’s development just as it starts to emerge from a prolonged downturn. It also looks worrisome from a broader perspective for Chinese panel makers, since signs are emerging that their products could also be shunned in Japan and India, 2 of the world’s other promising emerging markets for solar power plant construction.

I’ll return to the Japan and India angle shortly, but let’s start with the latest news that comes in the form of a new ruling by the US International Trade Commission (ITC). (English article) A panel recommended earlier this year that the ITC should levy anti-dumping tariffs against Chinese solar panels that were made with cells produced outside the country in places like Taiwan. Such cells are the main component used to make finished solar panels.

The ITC had ruled in 2012 that Chinese solar panels received unfair government support through policies like cheap loans from state-run banks and export rebates, and imposed anti-dumping tariffs against the products. But the Chinese manufacturers used a loophole to skirt the punitive tariffs, which didn’t apply to panels that were made using solar cells manufactured in other countries. Now the ITC is moving to formally close that loophole with this latest ruling.

Under the new preliminary ruling, the US Commerce Department has recommended preliminary duties of up to 35.21 percent on Chinese-made panels that had avoided the punitive tariffs through the loophole. Some duties are a bit lower, with one report pointing out that panels from Trina Solar (NYSE: TSL) will be subject to punitive tariffs of 18.56 percent. Actual amounts could differ slightly, but I do expect the tariffs will get finalized later this year and deal a new blow to the Chinese panel makers.

We’ll probably see a flood of disappointed statements from the Chinese panel makers soon, and Germany’s SolarWorld (SRWRF), which has initiated most of the complaints, was quick to issue its own praise for the latest decision. (company announcement) There’s still time for the 2 sides to negotiate a settlement before the tariffs are finalized, which is what happened with a similar complaint in Europe last year. But based on the recent climate of hostilities between the US and China, I doubt we’ll see such conciliatory actions take place.

This latest US move, while quite expected, is casting yet another shadow over solar panel makers just as it appeared the sector’s woes from a recent supply glut were in the past. India announced late last month it would levy anti-dumping tariffs against Chinese and US solar panels, in what looks like a highly protectionist move to promote its small homegrown industry. (previous post)

Meantime, I’m hearing that Japanese banks are making similarly protectionist noises by refusing to finance any new solar power projects in Japan unless they use panels made by local companies. That’s certainly not a positive sign, since Japan is quickly emerging as one of the world’s biggest hot spots for new solar plant production as the country seeks to diversify from its previous heavy reliance on nuclear power.

At the end of the day, all of these protectionist measure will slow development of the global solar sector. US and European companies should enjoy relatively free access to each others’ markets, and Chinese and Japanese companies will inevitably dominate solar power building in their respective home markets. But lack of competition means prices will probably remain artificially high in many of those markets, making construction of new plants less commercially attractive than it would be under a more competitive environment.

Bottom line: The latest US anti-dumping ruling against Chinese solar panels is the latest sign of a rapidly emerging protectionist mentality in the sector, which will keep prices artificially high and stifle development.

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.

June 03, 2014

Growth Stocks Shrivel; Income Stocks Grow

Ten Clean Energy Stocks For 2014: June Update

Tom Konrad CFA

While the major market indexes were hitting new highs in May, small capitalization stocks and clean energy stocks (most of which are small cap) continued to lag.  The broad market benchmark IWM gained just 0.2% and is down 2.3% for the year, while my clean energy benchmark PBW fell 3.2% cutting its gains for the year to a slim 1.2%.  Meanwhile my 10 Clean Energy Stocks for 2014 model portfolio managed to eke out a 0.3% gain.  All of that gain was in the form of dividends paid, without which it would have been flat for the month.  For the year to date, the model portfolio has edged ahead of both benchmarks with a total return of 2.8%.

The key to this relative out-performance has been my focus on income and value stocks.  Growth stocks had a particularly painful two months in April and June, and growth stocks dominate the clean energy indexes and most clean energy mutual funds.  The trend can also be seen in my model portfolio, as I pointed out last month when I contrasted the first six income oriented stocks with the remaining four, which I lumped together as "growth." 

I was a little too casual about calling Power REIT (PW) and Alterra Power (MGMXF, TSX:AXY), "growth" stocks, however.  While both do have expansion plans, the main reasons they are in the list are Alterra's low valuation compared to the value of its assets, and Power REIT's potential for a large legal windfall.  Hence, if I were to categorize the investment theses more precisely, I would call Power REIT a "special situation" and Alterra a value stock.  I make these distinctions because it re-emphazies the pummeling growth stocks have taken recently- Ameresco (AMRC) is down 33% and MiX Telematics (MIXT) is down 17% so far this year.  These two are the only stocks in the portfolio which are down at all.  The other eight picks are up an average of 10%, as you can see in the chart below:
10 for 14 June

Individual Stock Notes

(Current prices as of June 2nd, 2014.  The "High Target" and "Low Target" represent my December predictions of the ranges within which  these stocks would end the year, barring extraordinary events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/26/2013 Price: $13.85.     Low Target: $13.  High Target: $16.  Annualized Dividend: $0.88.
Current Price: $14.03.  YTD Total US$ Return: 2.9% 

Sustainable Infrastructure REIT Hannon Armstrong announced first quarter normalized earnings of $0.20 a share, slightly lower than analyst expectations, but re-affirmed full year guidance.  The main cause of the temporarily lower earnings was the timing of maturing investments and the issuance of HASI's first "Sustainable Yield Bond" (SYB) at the end of December.  By issuing the fixed-rate SYB, HASI reduced its exposure to the interest rate fluctuations on the balance of its bank line of credit, better matching the interest rate profile of its assets and liabilities.  This comes at the cost of higher interest payments and lower earnings in the short term.

HASI also announced the purchase of a $107 million portfolio of land under wind and solar farms, along with the associated leases to the renewable energy facilities. 

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
12/26/2013 Price: C$4.85.   Low Target: C$4.  High Target: C$6. 
Annualized Dividend: C$0.24.
Current Price: C$5.25. YTD Total C$ Return: 10.7%.  YTD Total US$ Return: 8.8%

Green building company PFB announced a loss of C$0.27 per share for the first quarter compared to an adjusted loss of $0.12 a year earlier.  The first quarter is always weak for the building industry, and the icy winter exacerbated that effect this year.  PFB operates mostly in the northern US and Canada, and all of the decline came from its Canadian operations. Nevertheless, the company's backlog "remained robust" and it paid its regular C$0.06 quarterly dividend.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/26/2013 Price: C$4.05.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.46.  YTD Total C$ Return: 29.9% .  YTD Total US$ Return: 27.6%

Independent power producer Capstone Infrastructure reported very strong first quarter performance, with adjusted funds from operations up 46% from a year earlier due to the additions to its wind portfolio.  This and the financings for its Skyway 8 and Saint-Philémon wind power developments underline Capstone's successful diversification away from reliance on its Cardinal gas cogeneration facility.  While Cardinal is currently immensely profitable, its copious cash flow will be greatly reduced under the recently finalized agreement with the Ontario Power Authority, which commences at the start of 2015.  Knowing this was coming, management has spent the last couple years investing the profits from Cardinal in renewable energy development.  That strategy is now beginning to pay off for investors.

Capstone insiders seem to think these investments will continue paying off.  Three of them bought a total of 15,300 shares in May, while another sold C$29,000 worth of (safer) preferred shares and bought $42,000 worth of (riskier but with higher potential for gain) common shares.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
12/26/2013 Price: C$4.93.   Low Target: C$4.  High Target: C$7. 
Annualized Dividend: US$0.28. 
Current Price: C$5.17.  YTD Total C$ Return: 12.5% .  YTD Total US$ Return: 5.7%

Waste heat recovery firm Primary Energy fell back a bit after the initial enthusiasm last month over the recontacting of its Cokenergy facility and dividend increase to US$0.07 quarterly.  It paid its first 7¢ dividend on May 30.

5. Accell Group (Amsterdam:ACCEL, OTC:ACGPF).
12/26/2013 Price: €13.59.  Annual Dividend €0.55 Low Target: 11.5.  High Target: €18.
Current Price: €13.70. YTD Total  Return: 4.9% .  YTD Total US$ Return: 3.0% 

Bicycle manufacturer and distributor Accell Group went ex-dividend for its 2013 annual distribution of €0.55.  The dividend is set on an annual basis based on last year's profits.  Since sales have been better so far this year, I expect next year's distribution to be higher.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/26/2013 Price: C$10.57.  Low Target: C$8.  High Target: C$16. 
Annualized Dividend: C$0.585.
Current Price: C$12.30.  YTD Total C$ Return: 18.7% .  YTD Total US$ Return: 16.6%.

Leading transit bus manufacturer New Flyer announced its first quarter results, with sales, cash flow, and earnings all increasing strongly from prior year numbers on both an absolute and per share basis.  The company continues to work through a backlog of lower-priced orders placed during the downturn, but sees prices for new contracts normalizing in many markets.

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64Low Target: $8.  High Target: $16.  No Dividend.
Current Price: $6.43  YTD Total US$ Return: -33.3%.

The stock of energy performance contracting firm Ameresco stabilized after two months of bad performance following investors' disappointment with management's first quarter outlook.  Insiders maintain faith in the company's long term prospects, and bought 48,000 shares in May.  One reason the company's growth prospect may pick up will be the likely inclusion of energy efficiency as a compliance mechanism for the EPA's proposed rules for new carbon pollution standards from existing power plants.

8. Power REIT (NYSE:PW).
12/26/2013 Price: $8.42Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $9.23 YTD Total US$ Return: 9.6%

Solar and rail real estate investment trust Power REIT filed its first quarter results.  Legal expenses fell from the previous year to the point where the company declared a small profit of 3¢ per share.  The company also declared the first quarterly dividend on its preferred shares (NYSE:PW-PA), payable to holders as of June 7th.

Hannon Armstrong's purchase of land underlying solar and wind farms mentioned above validated Power REIT's own business plan, but also introduces a larger and much better funded competitor.  That said, the value of land underlying wind and solar farms is an order of magnitude larger than either company's enterprise value, so I expect the validation of the concept will be more helpful in allowing Power REIT to find investment opportunities than the competition will be in taking them away.

9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price: $12.17Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $10.09. YTD Total ZAR Return: -14.4%. YTD Total US$ Return: -17.1%

The stock of global provider of software as a service fleet and mobile asset management, MiX Telematics continued to decline along with the other stocks in the industry and growth stocks in general.  But unlike competitors such as Fleetmatics (NYSE:FLTX), most of MiX's costs are denominated in South African Rand, while revenues are in a broad range of global currencies.  Where MIXT was already trading at a much more attractive valuation than FLTX, the recent currency movement should increase its relative attractiveness as its results are boosted by currency changes.  Results for the period ending March 31st will be announced on June 5th.

I added to my position when the stock fell to $9.95 during the month.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
12/26/2013 Price: C$0.28. Low Target: C$0.20.  High Target: C$0.60. No Dividend.
Current Price: C$0.31   YTD Total C$ Return: 10.7% .  YTD Total US$ Return: 7.0%.

Renewable energy developer and operator Alterra Power announced first quarter results.  Revenue and EBITDA increased due to lower repair costs and currency fluctuations.  Construction continues on its Jimmie Creek run of river hydropower plant in British Colombia.

Two Speculative Clean Energy Penny Stocks for 2014

speculative june 14.png

Ram Power Corp (TSX:RPG, OTC:RAMPF)
12/26/2013 Price: C$0.08.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.035   YTD Total C$ Return: -56% .  YTD Total US$ Return: -57%.

Geothermal power developer Ram Power reported the results of the stabilization period and performance test of its marquee San Jacinto-Tizate project after an extensive remediation program. In the company's words, the results "did not meet our expectations." The company is "now in technical default of the... loan agreements for failure to achieve a minimum MW output."

I included Ram as a speculative pick on this list because I hoped the remediation program would produce better results. Since it did not, I feel the best course of action is to cash in this lottery ticket rather than taking on a new gamble.

The new gamble in question is the hope that, as a reader put it, "potential suitors will bid generously for the company."

That's not a gamble I'm interested in taking, although there is a case to be made for letting the much money ride.  At the current price of C$0.035, the market capitalization is only C$13 million (US $11.7 million).  The company recently received $6.4 in cash for its Geysers Project from US Geothermal (NYSE:HTM.)  Given the low valuation, it would not be hard to see the stock price multiply if management can capture any value from San Jacinto or Ram's early stage projects.

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
12/26/2013 Price: C$0.075.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.09   YTD Total C$ Return: 20% .  YTD Total US$ Return: 17%.

Shares of wind project developer Finavera gave back some of their gains on a lack of news.  Now that the sale of its Meikle wind project to Pattern Energy Group (NASD:PEGI) has closed, investors expected an update on the company's strategic plan last month.  This lottery ticket still seems to have a lot more upside than downside, so I continue to wait.  But given the repeated delays and disappointments, that business plan will have to be very attractive to persuade me to vote for anything other than a return of the company's capital to shareholders.

Disclosure: Long HASI, PFB, CSE, ACCEL, NFI, PRI, AMRC, MIXT, PW, AXY, FVR, PEGI.  Short PEGI calls.

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

June 02, 2014

Gevo Begins To Ship Missing Link For 100% Renewable Plastic Bottles

Jim Lane

From Colorado, news has arrived that Gevo (GEVO) is now selling paraxyleme to Toray (TRYIF), one of the world’s leading producers of fibers, plastics, films, and chemicals. It’s producing PX from isobutanol, one of its three molecules in production (the others are jet fuel and iso-ocrane) at its complex in Silsbee, Texas. Toray expects to produce fibers, yarns, and films from Gevo’s PX.

While any new molecule attached to a major customer relationship is always big news for any producer — this has special significance. Let’s review exactly why.

PX is the missing ingredient in the production of a highly-sought after material — 100% renewable plastic bottling.

What is plastic bottling? It is a material called PET (For you purists: polyethylene terephthalate. Say that three times real fast.) It’s a form of polyester that is see-through, and is an excellent barrier material. Not much gets through these little molecules.

Accordingly, it’s become the third most widely-produced polymer in the world, after polyethylene and polypropylene. PET makes up about 20 percent of the world’s polymer production, and about 30 percent of that PET goes into making plastic bottles. Global PET production is estimated at 20 million metric tons per year by ICIS — and is selling for right around $1500-$1600 per metric ton this year.

So, an $30B+ market. Wow.

In steps Coca-Cola

Seeing high customer demand for more eco-friendly product packaging, Coca-Cola (KO) introduced the first-generation Plant Bottle in 2009, with up to 30 percent renewable content. The company has now distributed more than 10 billion first-generation PlantBottle packages in 20 countries worldwide, and is bullish on reaction from customers.

Why the limit at 30% renewable content? That’s where PX comes in. It’s PET is produced from renewable MEG (ethylene glycol) and PTA (purified terephthalic acid). PTA in turn is produced from paraxylene (PX), which until now has not been available from renewable sources on a commercial basis.


If it can find or foster sources of renewable PX, Coke aims for 100 percent plant-based packaging, at scale, by mid-decade — and that means billions for the producers, and the key to it all is renewable PX. It’s also worth pointing out that according to ICIS and Nexant, the global PET market is facing huge overcapacity problems in the wake of large amounts of new PTA capacity coming on line in China. So — a good, solid market in renewable PET, safely protected from low operating rates, plant shutdowns, and bad margins — well, it’s not only big business, but great business.


The Toray relationship

The Toray “buy” is the culmination of a multi-year effort that first surfaced in 2012, when we reported that Toray signed an offtake agreement for renewable bio-paraxylene (bioPX) produced at Gevo’s (then) planned pilot plant. The agreement enabled Toray to carry out pilot-scale production of bioPET, and the company was able to offer samples to its business partners, last year. Using terephthalic acid synthesized from Gevo’s bioPX and commercially available renewable mono ethylene glycol (MEG), Toray had succeeded in lab-level PET polymerization to produce fibers and films samples in 2011.

Later came news that Coca-Cola was stepping forward to invest in pilot plants at Virent, Avantium and Gevo in pursuit of renewable plastic bottling — though Avantium, in its case, would by using its YXY chemical catalytic technology to produce an alternative molecule, PEF, that it believes can provide equal or better product performance to PET.

Why not just use, say, polyethylene?

Good news, Coke does, in Odwalla juice products. Works for juice in the fridge. Does not work for products outside of the fridge, especially carbonated ones.

Back to PX.

The PX was sold under a previously announced offtake agreement with Toray. Toray also provided funding assistance for the construction of Gevo’s PX demo plant at its biorefinery at South Hampton Resources, where Gevo also produces other hydrocarbon products such as renewable jet fuel and renewable iso-octane.

As a result of the shipment, Gevo will recognize revenue associated with both the sale of the PX, as well as the initial funding assistance provided by Toray for the project.

Gevo has also received support from The Coca-Cola Company for the development of its renewable PX technology. Research and development support was provided by The Coca-Cola Company under a previously announced Joint Development Agreement.

“We greatly appreciate the support that Toray and The Coca-Cola Company have provided Gevo in developing bio-PX. This is a groundbreaking achievement that we are very proud to have accomplished. This demonstrates that bio-isobutanol is truly a building block for the renewable chemicals industry,” said Gevo CEO Pat Gruber.

The business case

Here’s the good news, from our report on paraxylene and its opportunities:

“In the case of a Gevo-retrofitted plant, the biorefiner can produce biobutanol plus co-products, or paraxylene and the same co-products – to give one example. Turns out, in renewable fuels as well as elsewhere, it takes two (products) to tango. Pricing moves around in these volatile markets, but as a rule of thumb, paraxylene prices at around a 25 percent premium to ethanol (after taking into account the lower yields of isobutanol, per ton of feedstock). PET sells for roughly a 125 percent premium.”

Having trouble remembering all this?

Here’s a way to keep the supply chain in mind:

After buying some vinegar at the PX, Meg went to the PTA with her pet.

The bottom line

For Gevo, probably the good news couldn’t come too soon. Having gone through dilutive financing events to shore up the balance sheet, mired in an IP battle with Butamax, and having struggled with infections at Luverne that have kept the plant from a 100% shift-over to isobutanol production at or near nameplate capacity— well, the company can use good news, and this market is potentially huge for the comoaby in terms of volume and margins.

For Coca-Cola and Toray, it’s a sign that the strategic entry into renewable PX is showing signs of heading for commercial scale. Although 98% of global PX demand is for plastic bottling — it’s quite possible that Toray and others could open up other markets using bioPX as an ingredient.

But the advance towards 100% renewable Plant Bottle packaging is news of major import — and a sign that Gevo and some combination of partners may well proceed to build a commercial plant, if the product continues to perform as expected and the economics are in line.

Where might this go? Beyond Coca-Cola plastic, there’s already work going on a Sea World, Ford and Heinz to adopt the new technology — Coca-Cola has said on several occasions that it intends to foster broad demand for renewable plastics as part of its overall sustainability mission (and, not coincidentally, to ensure robust and affordable supply of the materials).


Some of that will remain dependent on corn dextrose pricing — since that’s Gevo’s fundamental feedstock. For now, prices have been good, if not historically great. Much will depend for the prices for the reainder of this year — on crucial corn reports due from USDA in July and August on crop conditions.

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.

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