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November 30, 2014

Chinese Solar Cos Go Shopping To Avoid Troubles At Home

Doug Young 

Bottom line: Sputtering progress for China’s solar power build-up could erode domestic panel makers’ performance, prompting some to buy more overseas assets to avoid punitive trade barriers in the west.

The latest trouble signs in China’s ambitious solar power build-up are coming in newly released quarterly results from Trina (NYSE: TSL), which has reduced its annual sales targets after scrapping one of its planned new projects in the country. At the same time, China’s industry continues to look for ways to circumvent anti-dumping tariffs in the west by setting up off-shore production and purchasing foreign assets to avoid such penalties. In the latest move on that front, a unit of China National Chemical Corp, also known as ChemChina, has just announced its purchase of a major panel producer in Norway for about $640 million.

China’s major solar panel makers have relied on exports for much of their explosive growth over the last decade, with the big majority of sales going to buyers in Europe and North America. But both markets have taken punitive actions against Chinese panels over the last 2 years, complaining that Chinese manufacturers receive unfair state support in the form of policies like export credits and cheap loans from big state-run banks.

The Chinese firms were depending on a major build-up of China’s domestic solar power industry to help offset losses in western markets, though signals earlier this week indicated that program was running into some headwinds. (previous post) Now we’re starting to see some real results of those headwinds in the newly released quarterly results of Trina, one of China’s top panel makers.

The company reported fairly respectable results for the third quarter, with revenue up nearly 20 percent on a quarter-to-quarter basis and profits up a more modest 3 percent due to foreign exchange factors. (company announcement) But investors were spooked by the company’s downward revision of its full-year guidance for module shipments.

The main factor behind that revision appears to be a solar farm that Trina planned to develop in Inner Mongolia, but ultimately scrapped due to changes in government policy. Trina said those policy changes could also affect the company’s pipeline of other projects. That gloomy outlook sent Trina’s shares down 5.2 percent, and they now are trading 43 percent lower than a peak reached back in March.

Interestingly, shares of other major players like Yingli (NYSE: YGE) and Canadian Solar (Nasdaq: CSIQ) didn’t drop in the latest trading session, even though these companies will also be affected by the same trends that are hurting Trina’s outlook. Accordingly, I wouldn’t be surprised to see these shares also come under pressure soon, and for the entire sector to feel some pressure through the first half of next year until the China situation clarifies.

Meantime, the other major news bit from the solar sector has China National BlueStar Co, a unit of ChemChina, purchasing Norwegian solar panel maker REC Solar (Norway: RECSOL) for 4.34 billion kroner, or about $460 million. (English article) REC previously had manufacturing operations in Norway, but later closed all of those and now does all of its manufacturing in Singapore. Analysts are saying the deal could be followed by similar ones that see Chinese producers purchase offshore assets to circumvent barriers in Europe and North America.

The United States has levied punitive anti-dumping tariffs against Chinese-made panels, and the European Union (EU) has taken similar actions through an agreement negotiated last year requiring Chinese panel makers to voluntarily raise their prices. But solar panels made in the west and other markets like Singapore aren’t subject to those actions. Accordingly, we could see more similar purchases in the year ahead, and the trend could even accelerate if the solar build-up in China shows further signs of stalling.

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

November 28, 2014

China Struggles To Meet Solar Targets

Doug Young

Bottom line: China is likely to fall well short of its plan for 35 gigawatts of solar power capacity by the end of next year due to profit-seeking speculation and lack of experience among plant builders and operators.

I’ve been quite skeptical for a while about China’s ambitious plans to rapidly build up its solar power capacity, arguing that many of the plants being built are more designed to please central planners in Beijing than of real practical use. Now it seems at least one researcher at a major government institute agrees with that view, prompting him to slash his forecasts for new construction this year. That certainly doesn’t look good for big domestic names like Yingli (NYSE: YGE) and Trina (NYSE: TSL), which are hoping to keep their recent positive momentum going with big new demand from plant developers in their home market.

The latest report contains interesting details on some of the major problems dogging China’s new solar building campaign, which has the country aiming to install 35 gigawatts of capacity by the end of 2015. The biggest problem is one that I previously discussed, namely that many of these projects would be built in remote locations that would have difficulty delivering power to China’s central grid.

But a second problem also emerged this fall as some developers started using the build-up program to make some quick money through a quirk in recent modifications to the power pricing system. None of this is too unexpected, since it was probably unrealistic that China could successfully execute such an ambitious build-up so quickly, especially when it had very little experience at such construction just 2 years ago.

But the growing reality could crimp ambitious sales targets for solar panel sellers that were depending on strong domestic demand to keep fueling their recent rebound. It could also turn into headaches for names like Trina and Yingli, which have recently set up funds for solar plant construction. Those funds could take a hit if many of their new projects get built but then fail to find long-term buyers due to poor planning.

China is now expected to build 10 gigawatts of new solar power capacity this year, well short of an earlier target for 14 gigawatts and a sharp slowdown from last year’s 13 gigawatts, according to the new report from Wang Sicheng, a researcher at the Energy Research Institute of the National Development and Reform Commission (NDRC). (English article) Only 3.8 gigawatts of new capacity were built through September this year, though the report notes that the fourth quarter is typically the strongest for new construction.

It seems that one of the biggest issues has come from lower-than-expected usage of power by local customers from these newly built plants using rooftop-mounted solar panels. Earlier plans that envisioned that such local consumers would use 80 percent of power generated at such plants, with the remaining 20 percent set for sale to more distant locations. But plant operators have only been able to sell about 60 percent of their power locally, because many such plants are located in remote locations with sparse population.

Adding to the problems was a wave of speculative new project announcements that look purely related to a recent preferential tariff announcement designed to promote growth in inland areas. The NDRC quickly moved to plug a loophole that was fueling the speculation, but the result is that many of the new plants announced during that window may never get built since many were conceived simply to earn some quick profits.

These kinds of shenanigans and logistical problems certainly aren’t unique to China. But in this case they’re quite acute due to Beijing’s desire to ramp up solar power output so quickly despite its lack of experience. I do expect we’ll see the rapid build-up continue, but at the end of the day we could see a significant number of planned projects get scrapped, and an equally significant number that do get built ultimately hit financial difficulties due to poor planning.

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.

Highlands EnviroFuels Wants Gevo's Isobutanol Tech For Florida Plant

Jim Lane

gevo logo Plant to convert sugar cane and sweet sorghum to 20-25 million gallons per year of Isobutanol

From Colorado, Gevo (GEVO) announced that Highlands EnviroFuels has signed a letter of intent to become a Gevo licensee to produce renewable isobutanol.

Highlands will build a commercial-scale “Brazilian-style” syrup mill in Highlands County, Florida, which would have a production capacity of approximately 200,000 metric tons of fermentable sugar per year. The facility will process locally grown sugar cane and sweet sorghum to a high quality syrup as a clean sugar stream for fermentation and recovery of isobutanol. The isobutanol plant would be bolted on to the back-end of the syrup mill and have a nameplate capacity of approximately 20-25 million gallons per year.

The US cane background

You might ask yourself, since the US has some extensive cane-growing areas in Hawaii, Florida, and Louisiana — and since sugarcane ethanol has been so successful in Brazil, what gives with US sugarcane ethanol? The answer lies in protected pricing — sugar has been historically protected in the US, and the price thereby has been substantially higher than, say, Brazil or Mexico, but strict quotas on imports have ensured a market but one that generally is only affordable for food sugars, not fuels.

A number of ventures over the years have come close to announcing a project based around sugarcane bagasse, energy cane, or other like assets in Florida. Coskata had an announced project that never quite got over the line. BP Biofuels had its first commercial project targeted for the Okeechobee region in south-central Florida, though focused on energy crops.

The Highlands background

Highlands has been in development for quite some time. Back in 2010, we reported that Highlands EnviroFuels said that it proceeding with plans to construct a 30 Mgy ethanol plant in Highlands County using sweet sorghum and sugar cane as a feedstock. The project will also produce 25 MW of green power, and the company said that it has signed LOIs with growers representing 48,000 acres of production to provide feedstock for the plant.

By fall 2011, we reported that Highlands EnviroFuels received its PSD Air Construction Permit from the Florida Department of Environmental Protection, authorizing the construction of a 36 million gallon per year Advanced Biofuel ethanol production plant in Highlands County, Florida. By then, the project had also expanded its power gen, moving to 30 megawatts of renewable power from residual cane and sorghum stalk fiber and leaves, known as “bagasse”. At the time, groundbreaking was targeted for Q2 2012.

There’s a lot of economic opportunity in the project. A study in 2011 concluded that plant would provide $51 million of GDP for the Highlands County economy and nearly $44 million in household income annually. In addition, the economic activity generated by the plant will support up to 60 full-time, high paying permanent jobs, and nearly 700 indirect and induced jobs in all sectors of the county. The study also estimated that the one-time construction impact will account for $47 million of GDP for Highlands County, generate more than $39 million in household income. Overall, the project received $7 million in support from the Florida Farm to Fuel fund as well as a $305,000 grant from the Florida Energy and Climate Commission.

The switch to isobutanol

Why make a $2 fuel when you can make a $4 fuel or chemical? That’s the question that, presumably, Highlands answered for itself in opting for Gevo’s isobutanol model — although we may well find that the proposed Highlands plant may utilize the Gevo side-by-side production approach to give itself the flexibility to produce both ethanol and isobutanol.

Reaction from the principals

“We believe the probability of success increases significantly by transitioning the project from ethanol to isobutanol,” Brad Krohn, President of Highlands, told The Digest. “given the tremendous market optionality for isobutanol (marine fuel, paraxylene for bio-PET, renewable jet fuel production, or chemicals). Not to mention isobutanol for gasoline blending does not suffer from the current blend wall as does ethanol. Nothing is yet binding with Gevo, but we are excited to be moving in this direction. We are eager to finalize the details of a binding agreement so that we can start constructing the facility.”

Pat Gruber, Gevo’s Chief Executive Officer, said, “We are very pleased to be working with Highlands and having them join Gevo as a licensee. This new partnership shows the flexibility of Gevo’s GIFT technology to convert a wide range of sugar sources into isobutanol. It also continues to validate the interest in licensing our intellectual property portfolio as we look to transition our business to focus more on a licensing model.”

The Bottom Line

LOIs are not hard contracts — and we’ll see how far this goes, it’s been a tough row to hoe for Highlands EnviroFuels in translating project ambitions into steel in the ground — and Florida repealing its own in-state E10 RFS last year didn’t help much.

Nevertheless, as the principals indicate, isobutanol gives the project some upside on the revenue side, and it’s been tempting and popular country for a number of project developers over the years. The combination of sweet sorghum and isobutanol might be just the sweeteners the project needs.

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

November 25, 2014

MagneGas' Industrial Plasma

by Debra Fiakas CFA

Alternative chemicals developer MagneGas Corporation (MNGA:  Nasdaq) is posting another guard at the gate.  The company recently filed a patent application to protect new enhancements of its plasma arc technology and gasification system.  Plasma is any gas taken to a whole new phase through extremely high temperatures.  For perspective the sun is actually a very large ball of plasma.  Here on Earth MagneGas is using its proprietary system to gasify carbon-rich liquids such as municipal wastewater to produce hydrogen gas for industrial applications and vehicle fuel. 

Many investors have probably heard about plasma gasification technology and might be wary that there is little to differentiate the MagneGas system from everyone else.  Granted MagneGas is not the first to use a plasma torch powered by an electric arc.  The electric arc provides a spark to ionize a gas and perform an operation like cutting metal.  Electric arc welders, torches and furnaces are widely used in manufacturing construction and solid waste treatment.

However, MagneGas has a lengthy history with plasma arc technology.  The company’s engineers have figured out how to maintain a stable electric arc under water.  Organic matter in the water is catalyzed by the electric arc and turned into a usable gas product.  The company calls it ‘submerged electric arc’ and already has received patent protection for their unique application, process and design.  MagneGas management touts its submerged electric arc innovation as more effective than vacuum or air electric arc technologies, especially when it comes to liquid wastes.

Technology Turns into Product with Large Market Opportunity

The company is using its plasma gasification system called Venturi to process waste water into a hydrogen-based alternative fuel.  The fuel is sold under the brand MagneGas2 as a substitute for natural gas to power industrial equipment or as an alternative to acetylene.   A highly flammable colorless gas, acetylene is put to wide use by industry, principally as feedstock for production of chemicals like butanediol.  However, acetylene is also commonly used for welding applications and metal cutting because of its high flame temperature.  The automotive, aerospace and glass industries are big consumers of acetylene.  Yet even these industrial users are sensitive to acetylene’s origins from hydrocarbons via calcium carbide (coke) or from methane combustion and the greenhouse gases that are emitted during the production steps.

MagneGas2 has been well received by the metalworking market because it is over a third faster than acetylene.  Using MagneGas2 also reduces the oxygen requirement, saving industrial customers time and money on the job, not to mention improving safety conditions for workers.  The company is planning demonstrations of MagneGas2 at trade shows to build awareness and interest.  To accelerate the penetration of the industrial market, MagneGas recently acquired a well-established gas distribution company based in Florida.  The plan is to cross-sell MagneGas2 to the distributor’s customers.

The company has a challenge ahead.  The acetylene market is highly concentrated and dominated by a few well-established suppliers, which compete intensely on price.  Air Products and Chemicals (APD:  NYSE), Linde AG (LIN:  DE) and Praxair (PX:  NYSE) are the incumbent acetylene suppliers, from which MagneGas will need to grab some market share by converting users of acetylene to MagneGas2.

Additional Markets

Management has additional markets in its sights.  The technology can also be used for sterilization so waste streams can be treated and re-used or safely disposed.  Plasma processing of waste is ecologically clean and the lack of oxygen in the process prevents formation of toxic materials.  An alliance with Pioneering Recycling has been struck to gain access to the medical waste market, where contaminated organic matter is a common problem.  The alliance is planning to use the Venturi system in sterilization mode to efficiently and effectively treat liquid medical wastes.

MagneGas has also teamed up with Future Energy in Australia to target the energy market.  An unnamed third party has been lined up to help with a demonstration to prove the viability of co-combusting MagneGas2 at a coal fired power plant.  The expectation is for higher electric output and reduced emissions.

Interested parties can also buy the equipment used to gasify liquid wastes such as chemicals or sewage.  The company is prepared to sell its plasma arc flow refinery in various sizes from 50 kilowatts to 500 kilowatts at about $10,000 per kilowatt.  Sales of the refinery system have been far and few between and do not seem to be a promising revenue source for MagneGas without a more serious business development effort.   

Better Mouse Trap at Bargain Price

It appears MagneGas really has invented a better mouse trap in the form of ‘submerged electric arc’ technology, but investors have yet to acknowledge the earnings potential of the invention.  Then again valuation is challenging.  The company has recorded revenue from early sales of MagneGas2 as well as development contracts, but the company has yet to post a profit.  In the most recently reported twelve months sales totaled $1.1 million resulting in a net loss of $6.8 million.  Accordingly, MNGA is valued at 27.5 times sales and its price-earnings multiple is negative.  

MNGA shares are trading below one dollar per share after backing down from a 52-week high stock price of $2.45.  The retreat in the share price might seem appealing for the bargain hunters.  However, investors interested in MagneGas technology will need to be patient in waiting for the company’s market penetration strategy to bear fruit.  The business model probably will take at least two to three years to unfold.  Thus watching quarterly results could get frustrating for investors with a need for fast action.  Trading volume in MNGA shares has built up to about 250,000 shares per day, helping to narrow the bid-ask spread to just under a penny.  Nonetheless, the stock is relatively volatile as measured by a beta of negative 2.80.   A long position in MNGA could quickly show a loss  -  at least on paper.

Surprisingly given the modest profile of this emerging business, a sizeable short position has built up in MNGA shares equal to about 1.3 million or 6.3% of the shares not held by insiders.  If the naysayers are proven wrong about MagneGas, the stock could get a boost higher as traders have to buy shares to close out their losing short positions.

In the meantime, patient investors might consider a reasonable case for sales, earnings and valuation for MagneGas based only on the market potential of its most developed product  -  MagneGas2.  If the company captures just 0.1% of the $40 billion world industrial gas market by successfully selling MagneGas2 as acetylene and natural gas substitutes, it could realize $40.0 million in annual sales.  In the long-term a 10% net margin is reasonable for MagneGas based on the success of incumbents in the industrial gas market.  That implies estimated earnings per share for MagneGas near $0.11.  The large chemicals and industrial gas suppliers are trading at an average of 18.0 times earnings suggesting that MagneGas shares could be worth $1.98 per share under this scenario.

Now that would be financial plasma!

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

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

November 24, 2014

Walmart Loves SolarCity

SolarCity (NASDAQ: SCTY) is up 5% on an unsurprising new solar deal with Walmart (NYSE: WMT)

By Jeff Siegel

slarwmtSolarCity (NASDAQ: SCTY) investors were a bit giddy Friday.

The company enjoyed a nice bump after it was announced that Walmart (NYSE: WMT) had hired the company to install new solar projects at Walmart facilities in up to 36 different states over the next four years.

SCTY has actually been working with Walmart since 2010, so it's not particularly surprising that Walmart's next round of solar installations is being carried out through SolarCity.

Now while I'm certainly pleased to see SCTY continue its healthy relationship with Walmart, it's not the actual solar installations I'm so excited about this morning. You see, this deal includes energy storage projects as well.

As I've mentioned in the past, it's the company's storage initiative that I believe will help keep it ahead of the curve. And for the past few years, SCTY has been testing storage projects at 13 Walmart locations. This new deal adds another ten storage projects to the list.

Of course, despite today's news and the nice push, SCTY is still trading below $60. Well below where I expected to see it this time of year. So it's still a pretty good bargain if you're looking for a long-term play in the solar space.

I currently have a one-year price target of $70.

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

November 23, 2014

Yield Co Pricing Less Irrational, But Plenty Of Opportunity Left

Tom Konrad CFA

  Yieldcos are companies which own clean energy assets and use the cash flows from them to deliver a high level of current dividend yield and (in some cases) the promise of significant dividend growth.  Investors like them because yield is scarce in the current low interest rate environment. 

While investors like the relatively high yield offered by yield cos, they are only starting to discriminate between yield cos on the basis of current and future dividends.  Four months ago, I published the following chart and noted that the yield cos with the highest current and expected yields were the most attractiveYieldcos by yield.png.  They were (from most to least attractive): "TransAlta Renewables [TSX:RNW, OTC:TRSWF], Hannon Armstrong [NYSE:HASI], Capstone Infrastructure [TSX:CSE, OTC: MCQPF], Brookfield Renewable Energy Partners [NYSE:BEP, TSX:BEP], Primary Energy Recycling [TSX:PRI,OTC:PENGF], and Innergex Renewable Energy [TSX:INE, OTC:INGXF]."

In the four months since then, the six yield cos I listed have produced an average total return of 3.9%, compared to the remaining five, which lost an average of 5.3%, even after the payment of dividends.  These relative moves make current pricing slightly more rational, but a mere 9% relative move is not nearly enough to correct the mispricing in this new and still misunderstood sector of clean energy investing.

Below, I will present an updated version of the same chart, accounting for dividend increases and price moves in the meantime, along with a couple corrections about plans for dividend increases at Abengoa Yield (NASD:ABY) and NextEra Energy Partners (NYSE:NEP).  Note that while correcting these mistakes would have made ABY and NEP relatively more attractive, they were overpriced relative to my six picks, just less overpriced than I thought.  NEP remains relatively overpriced today.  I also incorrectly showed Pattern Energy Group (NASD:PEGI, TSX:PEG) as a US-listed company when, in fact, it is also listed in Canada.  I've corrected these mistakes in the following chart:

Yieldcos by yield Nov 2014.png
The most attractive yield cos are the ones shown in the upper right.  The vertical axis shows current yield, while the horizontal axis shows the expected increase in yield over the next two year, based on management targets.  The changes in bubble size are in part due to increases in market capitalization due to secondary offerings, and partly due to my decision to use full market capitalization, as opposed to just the market capitalization of the stock which is held by the public.

Ignoring the green London-listed yield cos which are almost impossible for a US investor to purchase, the two most attractive yield cos remain Hannon Armstrong (HASI) and TransAlta Renewables (RNW).  Neither has changed much in price, but Hannon Armstrong has become significantly more attractive because of an increased dividend. 

Two other notable moves are Pattern (PEGI)) and Primary Energy Recycling (PRI.)  Pattern has become more attractive after a 21% decline in its stock price (resulting in a 27% corresponding increase in yield.)  I've dropped Primary Energy from the new chart because the company is in the process of being taken private and has suspended its dividend in the meantime.

What will happen in the next four months?  If the market continues its slow moves to price yield cos more rationally, it's a good bet that the three most attractive yield cos (Hannon Armstong, TransAlta Renewables, and Capstone Infrastructure) will out perform the three least attractive yield cos.  Those are Terraform Power (TERP), NextEra Energy Partners (NEP), and NRG Yield (NYLD.)

I'm invested accordingly. 

Disclosure: Long HASI, BEP, PEGI, RNW, CSE, INE, PRI, TRIG.  Short NYLD.

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

November 21, 2014

Northland Power's Solar-Backed Bond

By Beate Sonerud

Canada’s Northland Power (TSX:NPI / OTC:NPIFF) issued an asset-backed bond (ABS) last month through a SPV (Northland Power Solar Finance One LP). The amortising bond was a private placement of CA$232m with 18-year tenor. Semi-annual coupon is 4.397% and DBRS (Canadian credit rating agency) rated the issue BBB.

It is Northland’s first bond backed by renewable energy projects.  Since the bond is asset-backed the recourse is to the solar projects instead of to Northland Power. This allows Northland to move operational-phase renewable energy assets off their balance sheet, freeing up space for new renewable energy investments. The specific assets are six “Ground-Mounted Solar Phase I projects”, with each operating a 10MW solar facility that sell all electricity to the Ontario electricity grid.

Stable revenue streams for the duration of the bond are provided by the 20-year feed-in tariff contract between Northland’s solar projects and the Ontario grid. This is a good illustration of how policies providing price signals for green in the real economy can enable climate bond issuance. That the bond has achieved a BBB investment-grade rating without further credit enhancement is exciting: As feed-in-tariffs are in place in many countries, there are vast opportunities for other utilities to copy Northland’s model for ABS issuance backed by renewable energy assets that have their less risky operational phase.

Proceeds from the bond “will be transferred via intercompany loans to the six Ground-Mounted Solar Phase” and to Northland for “general corporate purposes”. Now, at first we were a bit worried about the latter, as Northland Power operates facilities for natural gas as well as wind, solar and hydro - meaning general corporate use of proceeds would have excluded the bond from our climate bonds universe.  However, we were happy to include it after Northland confirmed that the proceeds of the bond that are not used for the solar projects has been earmarked for the purchase of a large offshore wind project (Nordsee One) due to close early next year.

So why is that so exciting? Essentially the bond is an ABS version of the corporate use of proceeds bonds (such as Verbund) where proceeds are earmarked for specific green purposes. This matters as the bond not only refinances the underlying projects (that we would expect) but also enables Northland Power to grow its green portfolio - this additionally is what so many investors are looking for.

Now, Northland’s bond is not actually labelled green, but as we clarified that proceeds are aligned with a low-carbon economy, the bond issuance does fall into our unlabelled climate bonds universe. While we are happy to include the bond in our non-labelled climate bonds universe, future similar bonds could benefit from being labelled green. If Northland had decided to monitor and report on proceeds (and ideally gained a second opinion on green) we could easily have welcomed it to the green labelled universe.

Overall, exciting issuance structure – we hope to see it replicated by other utilities and renewable energy developers. Great work, Northland!

———  Beate Sonerud is Policy Researcher 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. 

November 20, 2014

Amyris' Date With Destiny: Better Late Than Never

Jim Lane amyris logo

Amyris was dismissed by the critics some time ago, but is ately continuing a big comeback.

We have become so accustomed to receiving obituaries of Amyris (AMRS) that recently I was inspired to re-read the Devotions of John Donne to discover if, in fact, he wrote, “Send not to know for Whom the Bell Tolls, it Tolls for Amyris.”

Amyris, we were recently assured by short-sellers, was as dead as a doornail, just as Jacob Marley was reputed to be in the opening stave of A Christmas Carol — and it is therefore enough to startle the angels when the quarterly earnings roll in and we read that not only is Amyris alive and well, sales are up 177% for Q3 (compared to Q3 2013), the company is expanding to a second molecule, and expects “cash payback on its Brotas plant” by 2016.

It is tempting to see the story of Amyris as one of unexpected redemption, a rescue from Hades effected by the miraculous intervention of Olympian gods, as if Orpheus had gone down to the underworld and rescued biobased farnesane from certain oblivion.

But it probably is more of a mundane case of Chicken Littles amongst industry observers— the plant was not ready for prime-time when first launched, a gigantic learning curve was embarked on in the harsh light of public company reporting, and what we are seeing is success delayed, rather than the deliverance of a soul from the underworld. Turns out that Chicken Little, in looking at the 10-Ks and declaring that the sky was falling in, was wrong yet again.

Now, if the company spent a considerable amount of time in the penalty box, that it understood — this market in these times is always happy to whack a technology stock that mistimes the forward projection of its arrival at break-even. There is little doubt that the Amyrisians up in Emeryville would like to have arrived in 2012 where they are today, and that they have been chopped up in the public markets for running the trains late — and running the trains on time, as we might recall, even propped up Mussolini’s reputation for a number of years. It is a virtue never to be discounted.

But there is indeed good news from Planet Amyris, and we are delighted to see it.

The New Molecule

On the molecule front, Amyris is now selling, via its global distributor network, a second renewable ingredient under its Neossance brand. Neossance Hemisqualane is a pure, plant-derived, light emollient with high spreadability and proven performance characteristics. Amyris touts that “this ingredient addresses the mid-price emollient market with better performance and competitive pricing compared to existing products in this large and growing market.”

Chief Business Officer Zanna McFerson adds: “Building on the success of our Neossance Squalane product, and after positive reaction from more than fifty customers who sampled our new hemisqualane product, we are expanding our Neossance portfolio of ingredients with another high performance solution for the cosmetics industry.”

What is hemisqualane, again?

If you have not quite yet mastered hemidemisemi, er, hemisqualane — you might not have memorized exactly what an emollient is, either, unless you have been spending more time with QVC or the Home Shopping Channel than might be good for you. An emollient is a moisturizing skin cream that softens and relaxes.

Back in the days when I was gainfully working at ELLE magazine, we would have regarded the arrival of a new, high-performing emollient right before Christmas as evidence that Santa Claus exists and that no hope for a year-end bonus is too outrageous as long as it is grounded in the desire of people to have youthful-looking skin well past the age of 115.

Amyris adds:

“Neossance Hemisqualane is a natural alternative to petroleum-based paraffins and silicone ingredients. Neossance emollients offer many high-performance properties that make them ideal ingredients across beauty categories including skin, hair, sun care, makeup and cleansing.

“In skin care, hemisqualane’s great sensorial profile and high spreadability create elegant and light textures with a non-tacky, non-greasy and smooth finish. Hemisqualane has a soft and silky after-feel with the ability to maintain a persistent emollience on the skin, making it a superior ingredient for many skin care products. In addition, its ability to dissolve crystalline UV filters makes it an ideal ingredient for sun care products.

“In makeup, hemisqualane facilitates a smooth and even application for lipsticks and foundations due to its high spreadability. It also demonstrates excellent cleansing properties for makeup removal applications including for waterproof formulations like mascara.

“For hair care, hemisqualane has good slip and a soft after-feel, which are critical attributes for products like conditioners and styling products.

Not surprisingly, Amyris touts: “We are very encouraged by the early response and demand we are experiencing from some of the leading brands in Japan, the Americas and Europe.”

Face vs fuel

Now, we’ve written much about food vs. fuel — who hasn’t? But there’s been less written about “face vs fuel” which is to say, why are companies like Amyris that were supposed to make jet fuels and diesels on the road to massive impact on bottom line and society, making emollients?

Keep in mind that squalane is a hydrocarbon, and a terpene — and if you visited ABLC Net this past week you would have received quite an earful regarding the bridge between flavorings, fragrances and high-performance fuels that exists in the world of terpenes. There must be more than 50,000 of them in nature — and when you are delighted by the fresh scent of Ponderosa Pine as you trek through California’s natural wonderlands, you are in fact getting a whiff of terpenes. They are advantaged hydrocarbons, as well, when it comes to super-dense fuels — and farnesane, which is Amyris’ primary pivot point, is already a source of fuels via its partnership with Total and we may well see some large-scale production of same before the end of the decade.

But for now, Amyris is all about generating business, and as most of us holiday shoppers have observed, fragrances are selling at just a teency bit of a premium over diesel. Like $100 for 3.5 ounces, vs $3.50 a gallon.

The financials

Accordingly, as Amyris ramps up production, the operating results of the company have a tremendous focus on the chemicals side.

Cowen & Company’s Jeff Osborne writes:

“Amyris reported strong operational improvements in 3Q. Product revenue of $11.5 mn was up 177% y/y due to strong fragrance strains; however jet fuel sales appear to be ramping slowly due to regulatory delays. The company now expects to be cash flow positive in 2015 versus late 2014, due to a change in collaboration inflows. Brotas appears to be running well and cash cost is targeted at below $3/L.

He added: “Amyris introduced a new farnesene strain at the Brotas refinery during the quarter, which should allow sub-$3/L production costs. We were pleased to see the company transition from making high ASP fragrance oil to farnesene without any issues or elongated downtime. The plant has run smoothly for 3 months, which should allay some investor fears after an up down initial 15 months out of the gates.”

Looking forward, Cowen & Co expects:

“About $30 million of renewable product sales in 2014 and a doubling of that in 2015, with a cadence of $10 mn per qtr in 1H15 and $20 mn per quarter in 2H15, as 6 new molecules ramp. Management reiterated that Brotas will have reached a cash payback by early 2016 as the company focuses on maintaining a total cash gross margin structure over 60%

Osborne warns: “We are keen to see how the company handles marketing 1 molecule in 1H14 to 2 currently to 8 by the end of next year. (aided by an ASP of ~$10/L with gross costs below $3/L).

Over at Raymond James, the always quotable Pavel Molchanov writes:

“After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013-2014 have been Amyris’ first years with operations truly in commercial mode. There is visible scale-up progress, but the historical reliance on partner-based R&D payments makes quarterly financials choppy. In addition to updates on the production ramp-up at the Brotas plant, the market wants to see additional clarity on the pace at which Total will be scaling up its fuels joint venture with Amyris. We maintain our Market Perform rating.

Molchanov highlights that expectations were “on” for Amyris to reach break-even in late 2014 on a cash basis:

“The clear-cut aim was for cash flow to finally turn positive in 2H14. Following 3Q’s cash burn, the updated timeline is for this milestone to be reached not right away but rather on a full-year basis in 2015. Lower near-term collaboration inflows are the main culprit for the pushout.

He adds: “It’s worth noting that Amyris is deliberately running Brotas to avoid complications, particularly after the painful experience of 2011-2012. Margins are emphasized over volumes, and, as such, our model projects late 2015/early 2016 for achieving full nameplate capacity at Brotas.”

On the recent downturn of stocks in the sector: “The stock has, of course, shown weakness amid the oil price selloff – as have essentially all other companies in the broad category of petroleum substitutes. As a sentiment trade, it’s understandable, but as a practical matter, there is virtually no linkage between the prices of oil and farnesene/squalane. The current focus for Amyris – and plenty of others in the bioindustrial space – is high-value materials rather than commodity fuels, and until Amyris establishes a meaningful footprint in the fuel market – unlikely until 2017 at the earliest – the direct read-through from oil prices for production economics is minimal.”

The Bottom Line

A new molecule, pushed out financials but nothing that deters analysts from predicting imminent turn to cash-positive in 2015, and an outlook that pushes on into larger-volume products later in the decade, including fuels: that’s the welcome news from Amyris.

Turns out that the company was not as dead as once broadly thought — but rather something of a late bloomer, and that’s not always a bad thing — as Ronald Reagan’s many admirers will recall that he only entered elective politics at age 55. He said something else that might be well re-purposed to a discussion of the Advanced Bioeconomy: “You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on earth, or we will sentence them to take the first step into a thousand years of darkness. If we fail, at least let our children and our children’s children say of us we justified our brief moment here. We did all that could be done.”

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

November 18, 2014

Advanced Energy: Bargain Green Stock Turns Around

by Debra Fiakas CFA

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed three stocks trading below industry average multiples of forecasted earnings. This is the final article in the series, the first looked at Ormat (ORA:NYSE), and the second looked at Kadant (KAI:NYSE). 
The first week in November 2014, could have been a turning point for trading in shares of Advanced Energy Industries, Inc. (AEIS:  Nasdaq).  The company reported flat sales in the quarter ending September 2014, compared to the same quarter last year, but delivered higher earnings by 15%.  Investors were thrilled with the results, bidding the stock higher in the first week of trading following the announcement. 

Advanced Energy supports industrial customers and the solar power industry with power conversion technologies and products.  Continued difficulty in utility-scale solar power sector has cut into demand for the inverters Advanced Energy supplies.  Sales in this segment were down in the most recently reported quarter.  Fortunately, demand for precision power products has been robust, delivering low double digit year-over-year growth.  Precision power products represent the largest portion of the company’s total sales.

What really got shareholders excited was management’s guidance for the December 2014 quarter that was announced during the earnings conference call.  Sales are expected to be in a range of $140 million to $150 million, a level which was in-line with the prevailing consensus estimate.  However, guidance for earnings in a range of $0.29 to $0.37 for non-GAAP earnings was well above the consensus estimate.  Advanced Energy has a consistent track record of beating the consensus estimate, which suggests management does a very good job of managing expectations with guidance levels that are achievable.

The prospect of higher than expected earnings helped the stock register a particularly bullish formation in a point and figure chart in the first day of trading following the earnings announcement.  The quadruple top breakout alerts investors to a significant amount of unmet demand and suggests the stock has developed sufficient momentum to reach the $30.00 price level.  If achieved this represents 47% upside potential.  Note that there is a very strong line of price support at the $19.00 price level, setting up a particularly appealing risk/reward picture for investors taking a long position in AEIS.

At the current price AEIS trades at 11.6 times the consensus estimate for 2015.  That multiple might even improve if analysts following the company take management’s bullish guidance into consideration.

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

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

November 17, 2014

Gevo Finds A Way

Jim Lane

gevo logoLike Rocky Balboa, no matter how many punches they take, Gevo [NASD: GEVO] just won’t fall over. In fact, the company’s prospects have brightened considerably in recent months — is the company “gonna fly now”? How and why is success on the horizon?

For most of its history, Gevo has looked like a long-shot — a company aiming at making high-value, bio-based butanol, mostly from corn sugars, via retrofitting its exotic bug into ethanol fermenters.

The opportunity is pretty simple to understand. Isobutanol sells for around 60 cents a pound, sugars check in at 16 cents a pound. If you can make the yields work, the upside is pretty good.

Of course, you have to get the butanol out of the broth before it reaches a point of concentration where it kills the magic bug — if you’ve splashed some rubbing alcohol on a wound to kill unwanted microbes, you’ll understand right away why an alcohol like butanol is deadly to Gevo’s modified yeast biocatalyst. So that’s part of Gevo’s portfolio of magic, a GIFT system for separating butanol out of the broth, that was so deft it felt like it was right out of Hogwarts:

Bacterium de-brothemus divisium!

Voila, a batch of butanol and all those magic bugs, separated out. Step right this way to clang the NASDAQ bell after your monster IPO, please.

It sort of worked out that way. The company raised a whole bunch of capital, recruited a team of notables and worthies, bought an ethanol plant that was too small to make money any more for a technology demonstration at scale, and navigated an IPO.

Then the butanol hit the fan.

Two problems beset Gevo even before the ink was dry on its IPO registration: a debilitating battle over intellectual property with DuPont, and an infection in the ethanol plant that was about as welcome to Gevo’s microbe as the ebola virus.

So beganneth Gevo’s long descent into a seemingly perpetual winter. The cash burn began to require ever-more dilutive capital raises.

“You have to hand it to [CEO] Pat Gruber for finding a way to keep going,” wrote a longtime reader in essaying Gevo in a private note last month.

For some time, it has looked grim, as the costs of litigation have stacked up, and not every battle has gone 100% Gevo’s way in the courts (though no knockout punches have been recorded by either party). Meanwhile, that little ethanol plant that didn’t make any money became an isobutanol plant that didn’t make any money. So, plans emerged to have it retro-retrofitted to make either ethanol or butanol, depending on which one offered a better return.

Which sounded to critics like a whole lot of optionality on the road to not making any money.

But then.

Against all odds

In its Q3 earnings announce, Gevo reported a net loss of just $200,000 on $10.1 million in revenue — compared to a loss of $15.9 million on revenues of $1.1 million for Q3 2013.

What? Where’s the funeral, the undertaker, the mournful relatives and investors dropping their share certificates onto Gevo’s coffin like flowers on a casket?

Gevo commented: “The increase in revenue during 2014 is primarily a result of the production and sale of approximately $9.2 million of ethanol and distiller’s grains following the transition of the Luverne plant to the SBS. During Q3, hydrocarbon revenues were $0.8 million, primarily related to the shipment of bio-jet fuel to the U.S. military during the quarter. Gevo also continued to generate revenue during the third quarter of 2014 associated with ongoing research agreements.”

It’s not all good — the company did not generate positive cash flow, and warned that it expects, ahem, “an increase in expense associated with its ongoing litigation with Butamax Advanced Biofuels,” — another way of saying that the lawyers are rolling through the dollars about as fast as they did in Jarndyce v Jarndyce, the case that ruined nearly every life it touched in Charles Dickens’ masterful Bleak House.

But there were a number of operational highlights: In Q3, Gevo decreased the plant-level EBITDA loss for the quarter by almost 70% as compared to Q1 2014, and has managed to double the isobutanol batch sizes and cut the batch turnaround times in half — and has been seeing prices of $3.50-4.50 per gallon from isobtuanol sales, as well as some revenues beginning from selling iDGs, its branded animal feed product from the isobutanol side of the Luverne plant.

Gevo’s Take

“Even before purification, isobutanol purity levels have been at 95%, excluding water, which has exceeded our targets. At the same time, isobutanol production costs continue to improve, and importantly, based on Luverne data, we can see that our long-term isobutanol production cost targets remain achievable with incremental process improvements. The team at Luverne has done a very good job implementing the SBS, moving down the isobutanol learning curve while successfully operating the ethanol side of the plant,” said the ever-optimistic CEO Pat Gruber.

But he had some friends in the land of Wall Street, which of course has been known to invest in some Hogwartzian enterprises from time to time, but when it comes to singing choruses of “Stand by Me”, rarely sticks with anything except the real thing for more than a few quarters.

Encouragement from the Street

Piper Jaffray’s Mike Ritzenthaler now has the stock (trading at sub-50 cents) price targeted at two bucks. He writes:

We maintain our Overweight rating and $2 target on shares of GEVO following a 3Q print which highlighted continued, steady technology improvements – suggesting that the company is on track to exit FY14 with the Luverne facility at cash break even, and poised to transition more ethanol fermenters to isobutanol in FY15.

“Higher than expected purity levels, reduced batch turnaround times, and a steadily increasing rate of isobutanol production should enable a run-rate of ~100k gallons of isobutanol per month. Turning to FY15, we see the potential for further cost cutting measures to further slow the cash burn, although we also note the probability of additional capital infusions as the company moves toward corporate-level EBITDA break-even.”

Ritz adds: “The most important takeaway on the technology front, in our view, is the high purity level of isobutanol production which should help drive production/tolling costs down. Combined with other improvements (such as lower cycle times and higher productivity) management was able to make and ship commercial quantities of isobutanol out of one fermenter at Luverne and is on track to hit a year-end run-rate of 50-100k gallons per month. Management reiterated on the call that ASPs for isobutanol are in the $3.50-$4.50 per gallon range, and while long-term economic targets are still in the distance, we think the company is sufficiently seeding markets needed to reach an inflection point in the business model in the 3-4 coming quarters.”

The Street is expecting one more dilutive cash raise between now and break-even — but the company is targeted for $66 million in sales, even in these days of falling commodity prices as China’s big economic engine grinds in low gear.

The Fast 500

Looking back, the growth is impressive. Just this week, Gevo was named on Deloitte’s Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America. Gevo grew 1,146% during this period and was ranked 103rd overall but, notably, in the industry where it competes, Gevo ranked third out of all clean technology companies.

Bottom line, break-even at Luverne — and some welcome dollars from the ramp-up in production — appears to be on the horizon in 2015. It looks like Gevo has found a way.

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

November 14, 2014

Kadant: Will Investors Clean Up With This Bargain Green Stock?

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed three stocks trading below industry average multiples of forecasted earnings. This is the second article in the series, thee first looked at Ormat (ORA:NYSE). 
A couple of weeks ago shares of Kadant, Inc. (KAI:  NYSE) registered an particularly bullish formation  -  at least from a technical standpoint.  A ‘triple top breakout’ was formed in a point and figure chart, suggesting demand for the stock outpaces supply.  Given the new momentum that has developed, the stock could reach as high as $52.00, representing 25% upside potential.

Kadant is trying to clean up the paper production industry with more efficient virgin pulp processing equipment and recycling solutions.  The company also makes biodegradable absorbent granules from papermaking by-products for agriculture, lawn, ornamental and industrial uses.  The company earned a 10.8% operating profit margin on $391.7 million in revenue in the most recently reported twelve months. 

Analysts who follow Kadant expect the company to deliver as much as 20% earnings growth over the next five years.  That is impressive and we would expect to have to pay as much as 20 times earnings to buy KAI.  Yet the stock is trading at 18.4 times trailing earnings and 13.5 times earnings predicted for 2015.  A current dividend yield of 1.4% makes the stock seems even more appealing.

The discussion today might be more or less academic.  A technical indicator, the Commodity Channel Index that has served me so well, suggests the stock is overbought at the current price level  -  at least temporarily.    A review of historical trading patterns suggests the stock has a fairly well developed line of price support at the $38 price level and another at $34.  While it is not clear if fundamental performance would disappoint investors enough to send the stock down to the $34 price level, it does seem possible that the stock could retrace price to the $38 price level.  Third quarter results send the stock soaring the day following the earnings announcement.  Any period of weakness in the broader market could bring the stock back to lower orbit near $38 per share.  For investors with a view to hold KAI for a period of time should find it worthwhile to wait and watch for a compelling entry point.

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

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

November 13, 2014

GCL-Poly Mops Up Chaori Solar Mess

Doug Young

Bottom line: Solar consolidators like GCL-Poly and Shunfeng will suffer short-term pressure due to difficult acquisitions, but could be longer-term beneficiaries as they earn government goodwill for their actions.

The latest deal involving an insolvent solar panel maker is seeing a group led by GCL-Poly Energy (HKEx: 3800) take control of bankrupt Chaori Solar, in a takeover that looks slightly ominous but also potentially interesting for investors. The ominous element comes from the fact that these bankruptcy proceedings are occurring Chinese courts, where local politics are often more important than forging deals that make commercial sense.

But the interesting element comes from the fact that many of these insolvent companies enjoy strong backing from their local governments. That means that once all the finances are cleaned up for these insolvent firms, they could actually become good longer-term assets for their new owners.

The short-term headaches for solar buyers are evident in the recent mixed fortunes for Shunfeng Photovoltaic (HKEx: 1165), which looked like a rising solar superstar when it purchased bankrupt former solar superstar Suntech. But Shenfeng’s fortunes have suffered a sharp setback in the last month, as the Suntech effect wears off and people realize the turnaround story could be long and difficult.

We’ll come back to the Shunfeng-Suntech story shortly, but first let’s look at the latest news that has the parent of GCL-Poly leading a group that will buy 66 percent of Chaori for 1.46 billion yuan ($240 million). (English article) The deal was part of a broader restructuring for Chaori, which made headlines this year when it became the first company in modern China to default on a corporate bond. (previous post)

The restructuring plan was approved by the Shanghai Municipal First Intermediate People’s Court late last month, and the buyer group has pledged to return Chaori to profitability this year and re-list it in 2015. That kind of pledge means that the buyer group has probably received key government support for the restructuring and will find a way to meet its targets, even if that means using aggressive accounting to return to profitability and calling on state-owned investors to make the new IPO a success.

It’s important to note that this GCL-Poly deal has several key differences from the earlier Shunfeng-Suntech one. In this case the buyer is actually GCL-Poly’s privately held parent, Golden Concord Holdings, meaning the risk associated with taking over Chaori isn’t being shouldered by the publicly listed company. In addition, the GCL-Poly parent is part of a larger group that includes 8 other members, and thus Golden Concord will only own 30 percent of Chaori after the deal, equating to an investment of about $72 million.

So, how have GCL-Poly’s shares reacted to the news? The stock has dropped steadily over the last 6 weeks, and is now down 17 percent from a peak at the end of September. That performance mirrors Shunfeng, whose shares have lost nearly half of their value over the last 2 months after media reports emerged saying a major solar plant it was helping to build had run into trouble. (previous post)

I suspect the magnitude of the Shunfeng sell-off was at least partly due to profit taking after a big run-up in the company’s shares on high hopes after the Suntech deal. And in fact, Shunfeng’s shares are now almost exactly at the same levels where they were at the start of this year before they embarked on a major rally.

So, the next bigger question becomes: What’s ahead for consolidators like GCL and Shunfeng, whose actions are motivated as much by local politics as by commercial factors? As I’ve said above, the political element of the equation means the stocks could come under short-term pressure as they deal with financial issues related to their purchases. But the goodwill they receive from local governments could be quite valuable over the longer term, meaning the stocks could see some strong upside potential once the current messes get sorted out.

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

November 12, 2014

Ormat: A Bargain Green Stock?

by Debra Fiakas CFA

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed several stocks trading below industry average multiples of forecasted earnings.
Tracking the geothermal power generators has frequently taken us to the door of Ormat Technologies, Inc. (ORA:  NYSE).  Ormat has two revenue segments:  power generation through geothermal generators and energy recovery and equipment sales to utility and industrial customers installing geothermal power plants.  The company owns and operates plants with 626 megawatts generating power and has supplied equipment around the world for another 1,200 megawatts.  The development pipeline is populated by thirty-five potential geothermal locations in the U.S., Southeast Asia, South America and New Zealand.

Last week during the company’s third quarter 2014 earnings conference call management spent quite a bit of time talking about two of its newest projects.  The company was recently awarded a $22.3 million contract to install its proprietary air-cooled energy converter at a natural gas compression station in Utah.  The station is part of the Kern River gas transmission system.  This will be the second recovered energy power generation facility on the pipeline.  The recovered energy plants reduces the use of energy content of the natural gas by about 30%.

Ormat also recently signed an agreement to design, construct and operation a 35 megawatt geothermal power project in Kenya.  Once completed Ormat will also arrange for financing and expects take advantage of guarantees from the African Development Bank.  Kenya Power and Lighting Company has agreed to buy all the power from the project.  This will be Ormat’s fifth power project in Kenya.

Investors have to pony up about twenty times projected earnings per share to take a long position in ORA.  That is a bit richer than the average PE multiple for the S&P 500, which is 16.7 times forward earnings for the group, but right on par with the forward earnings ratio for the Russell 2000 Index.  The geothermal segment of the power generation industry is trading at approximately 21.2 times trailing earnings.

On the surface the comparison of earnings multiples does not make ORA look like much of a bargain.  However, Ormat is set apart from the group.  ORA is among the most stable of the power generation stocks. True enough, utility companies are known for their stability in both earnings and stock performance.  However, it is rare to observe fast rates of growth and low beta measures of risk.  ORA offers both  -   a beta of 0.80 and forecasted earnings growth of 22%.  Thus ORA could trade at a multiple of 22.0 times earnings.  On a risk adjusted basis, ORA’s PE/Growth or PEG ratio is a compelling 0.73.

Furthermore, Ormat recovers some power of its own from its revenue in the form of operating cash flow.  In the most recently reported twelve months the company converted 43% of sales to operating cash flow.  Cash flows help support capital investments and a small dividend of $0.20 per share.  The forward dividend yield at the current price level is 0.7%.  Taking the dividend into consideration, provides a risk adjusted PE/Growth Plus Yield of 0.70

From a technical standpoint, ORA is neither overbought or oversold.  There is no strong trend higher or lower other than the short-term vacillations in the stock price.  Nonetheless, money appeared to have been flowing into the stock in the run up to the third quarter 2014 earnings announcement. Investors who want to take a long position in ORA might wait for the signs of upward momentum before committing capital or simply use the dividend payments as compensation for the time commitment.

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

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

November 11, 2014

Interview With Dan Oh, CEO Of Renewable Energy Group

Jim Lane REG logo

Leading a series this week, “The Strategics Speak", in which we’ll look at what a number of major strategic investors see in the landscape relating to industrial, energy and agricultural investment, Biofuels Digest visited with Dan Oh, CEO of Renewable Energy Group (REGI), which has long been the US’s leading independent biodiesel producer but in recent years has steadily diversified and expanded operations.

In many ways, REG is the entire industrial biotech business in a nutshelll. They’re fermentation (through REG Life Sciences), and thermocatalytic (through REG Geismar and their extensive biodiesel business). They use both sugars and lipids as feedstocks. They make both biodiesel and drop-in renewable diesel. They make fuels and an array of chemicals. They’re in the distribution and blending business — distributing their fuels blended with traditional fossil distillates. They have multiple plants and labs in the West, Midwest and Eastern sections of the country. They’re deep into some of the most exotic commercial synthetic biology out there.

In other ways, they achieve what others aspire to. Multi-feedstock, multi-product — it’s a reality, not a goal. Publicly traded after a successful IPO — a reality. Generating substantial cash flow — a reality. And don’t let the “aw, shucks” demeanor fool you for a moment — if they don’t “talk the talk” with the hyperbole of Silicon Valley, they “walk the walk” when it comes to building capacity, building revenues, and building reputation.

Dan OhThe Digest: The company has substantially diversified, in recent years, let’s start there.

Oh: That journey started in a practical sense in 2010, although we’ve always planned to be a broad energy & chemicals company. We’re grounded as a team in the lessons and disciplines of commodity agriculture, so we knew that we had to have to have a lot of options, more than just one raw material choice, adaptable technology, and many different products out of that.

So, we started with one feedstock and expand across the lipid spectrum, and in 2010 we started targeting other chemicals and fuels, beginning of a long we’ve of diversification. To date, we’ve invested almost $300m in diversification.

Lipids are a worldwide business as are sugars, and we are looking for base platforms that wecan grow and adapt, with a focus on the distillate area and the intermediate speciality chemicals. Right now, we’re building out biomass based diesel across North America, and ultimately taking it international, based on fundamental internal growth, M&A,plus technology upgrading and innovation. We’re generating great cash flow from advanced biofuels, and we have array of technology options out there, so we have got so many good choices that it is almost about what you’re not going to do rather than what you’re going to do.

The Digest: After a successful IPO, you now find yourself in a leading position when it comes to dialogue with Wall Street about industrial biotech. How do you talk about these advanced technologies there?

Oh: Money’s not brave. Wall Street want to see profitable companies, they want to see the downside protected and lots of upside. In our case, we are building an industrial business that happens to be green, and I think we’re getting credibility as an industrial company, with strong balance sheet, and looking backwards, over 100M in EBITDA each year on average. Our strategy is born from practical needs and experience, in the end, you’ve got to run a business, and be subject to standard finance practice just like everyone else, and let’s face it, all companies have a hard time raising money [at this stage].

The Digest: In the past year you acquired LS9, now known as REG Life Sciences, one of the hottest technology sets available. How it is going?

Oh: LS9 was a bit more like late stage private equity, there’s a body of work there that’s very good, now it’s time to move to commercialization and become profitable. We think the company will do better without, as a venture-backed company, worrying about about where the next round of finance is coming from, and not having to swing for the fences with a home-run product right away. The LS9 technology has the ability to iterate a lot of products, and on our side we have put together a platform of 500 people — and there are a lot of PhDs here, master degrees, these are not not minimum wage jobs here, this is a high talent business — when you combine out platform of people and logistics and distribution with a platform that can iterate a lot of products, you can see how to get that technology and those products into the market.

In many ways, these were two companies born of the same idea, both were originally designed to make biodiesel, we started with lipids, they started with sugars. The cool thing for us is that, from their earliest days until today, they continue to improve the tools, they are always innovating the science.

The Digest: The other major recent acquisition was the Dynamic Fuels / Syntroleum business. What’s the latest there?

Oh: We’re very pleased with the investment, and the transition from prior to current ownership, we’ve built from a lot of great decisions from the prior owners, and what we have been able to bring is a seamless commercialization team that understands refining, plus we have brought our feedstock pretreatment and refining technologies, and logistics system. It takes a total effort to make any plant work — you can’t just have a cool core technology. Now, as we have announced recently, we have achieved 90% utilization compared to nameplate capacity.

The Digest: For years now — whether it is the Renewable Fuel Standard, tax credits, or other aspects of energy policy, there’s been an extended dialogue with Washington DC about the advanced bioeconomy. Now, the midterm elections have swept Republicans to power int he Senate. How do you see that dialogue changing after the elections?

Oh: Advanced biofuels do have broad bipartisan support, in each region and state there are a body of politicians who see the benefits, and in general things come up on the “happy and satisfied” side of the scale when they look at the sector. we’ve talked wide and far to lots and lots of people,and we’re confident that that support is going to continue, and in fact the declining energy prices make it simpler for people to think about the good aspects of our energy policy in energy security, environment when there’s less extra cost pressure from energy, and it is a heck of a lot easier to absorb costs [from advanced technologies] into a low cost energy mix.

Our job is simple: we have to make quality fuel, we have to be affordable, we have to compete. But every gallon of biodiesel makes it easier to achieve the broader energy policy goals of diversifying the energy mix — and the benefit of biofuels on the agricultural sector are not difficult to see and there are more sectors that are benefitting from it, such as advanced manufacturing and high tech. Bottom line, you can be a hard core neoconservative, hard core environmentalist, or only interested in agriculture or some other industry, and you’ll find lots to like about advanced biofuels.

The Digest: There’s been quite a bit of expansion, yet you’ve spoken of international opportunities, should we expect to see more from REG? And if you target international expansion, will you be looking for advantaged feedstock, or a solid market, or what other factors might be on your mind?

Oh: We’re not done growing, that’s for sure! We’ve done something of consequence every quarter. We tend to be product and logistics focused when looking at a new market — right now we are long biomass based diesel, and the two biggest markets are the US and EU, and our strength in lipids might feed into a number of products there. But it’s not just a case of looking for a good market, there are lot of good technologies developed overseas, too. We look far and wide, we’ve not done anything but we do state that “we are actively looking”, and we will lead with things we do well, and we want to retain a fantastic group of people that we have built up.

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

November 10, 2014

Ramp-Up Delay Sends Solazyme Stock Into Free-Fall

Jim Lane solazyme logo

Revenue and customer numbers are up at Solazyme (SZYM), 60% YOY growth from Q3 2013 to Q3 2014. But a slowdown in the rollout at Moema capacity leads to a spectacular 58% one-day drop in the stock price.

What happened?

Solazyme has been on a relatively steady downward trajectory for the past few quarters, dropping from the $11-$13 range and down into the $6-$8 range.

And then plunged a stunning 58 percent to $3.14 yesterday – amidst downgrades by Cowen & Company, Pacific Crest and Baird — generally to Market Perform or Neutral, and remains at “Underweight” over at Piper Jaffray. Target stock prices have come way down.

All this carnage, we might add, even after a signature partnership with Versalis was announced to commercialize Encapso dilling oils. Versalis said that its initial emphasis for Encapso will be oil and gas fields operated by its parent company Eni, which represent a significant amount of the world’s petroleum drilling activity. Encapso will be featured as part of the company’s recently launched Specialty Oilfield Chemicals product portfolio.

What exactly gives for San Francisco’s [advanced bioeconomy] Giants?

Here’s the news

Total revenue for the third quarter of 2014 was $17.6 million compared with $10.6 million in the third quarter of 2013, an increase of 65%. Third quarter GAAP net loss was $39.7 million, which compares with net loss of $30.7 million in the prior year period. On a non-GAAP basis, the net loss was $35.3 million for the third quarter of 2014, compared with net loss of $22.3 million in the prior year quarter. A reconciliation of GAAP to non-GAAP results are included below.

“Our Clinton/Galva and Peoria facilities are performing well,” said CEO Jonathan Wolfson.”

Good news, so far. Then this:

“Progress at Moema is more mixed with the upstream process operating as expected, while the downstream process will require continued work to establish consistent, fully integrated operations.”

Analysts would, as we’ll see later in this report, used this new guidance from Brazilian operations as a catalyst to downshift the revenue growth rate to around 15% for 2015, targeting $70M instead of $350M.

Then this, on the company’s strategy.

“Commercially, we’re continuing to establish our Encapso and AlgaVia products in the marketplace while focusing additional attention on the development of higher value specialty products,” Wolfson said. “Strategically, we’re moving to intensify our focus on our high-value specialty portfolio, a move that will alter the near-term trajectory of our production ramp but which we believe will ultimately drive greater value for the Company.”

CFO Tyler Painter summarized:

“Our near term focus is on bringing Moema to fully integrated operations and focusing commercial activity around our high-value specialty products. As we execute on these goals, we are emphasizing prudent management of our capital, optimizing our product mix and positioning our manufacturing assets to maximize returns.”

Analysts would use this shift in strategy as further reason to downshift revenue growth, push out the “reaching break-even date” and raise the specter of a dilutive capital raise in 2015 to ensure liquidity for the company on its elongated timeline.

In plain-spoken words

Moema’s delayed, the big volumes are now in 2016 or 2017, so we’re shifting to higher margin, lower-volume markets.

What the analysts say

Pavel Molchanov at Raymond James expressed “frustration” with Moema delay, but said the “strategy makes sense” and saw value with the stock so far down. He wrote:

Downstream issues at Moema: frustrating, but ubiquitous in the space. Production challenges based on downstream processes at the Moema plant in Brazil are the main factors behind the slower-than-expected production scale-up and move down the manufacturing cost curve. Early costs at Moema were both higher, and lasted longer, than originally anticipated. Choppy power and steam operations – yes, something as prosaic as that – are among the specific culprits. None of this, to be sure, pertains to the core of Solazyme’s technology platform, but it’s frustrating nonetheless.

Slow ramp spurs retooling of production strategy. The operational shortfalls at Moema have led to a rethink of the strategy for production expansion. The new mantra – and E&P investors will be very familiar with this – is “value not volume”. Solazyme will further narrow the product range (and thus the scope of customers served), leading to lower sales volumes but higher pricing and blended margins…All in all, we think the strategy makes sense, even though the market clearly does not like the top-line pushout (shares are down 20% pre-market), and we continue to recommend buying the stock, particularly on weakness today.

Jeffrey Osborne at Cowen & Company was rethinking the models. He wrote:

Solazyme reported sub-par results for Q314. Management’s shift from high volume capacity to lower volume / high margin sales comes as a surprise, in the wake of low ASPs in its popular oils. Encapso and AlgaVia progress was stressed, and 2015 sales were guided well below consensus. With the loss of Moema as a catalyst, we are lowering our rating to Market Perform, and our price target to $7

Management’s overhaul in business strategy follows negative margins in typically lower margin product areas. As a result, the company has guided for only a 15% increase in 2015 revenue

The shifted focus to low-volume, high margin sales, in tandem with operational benchmarks falling short, is inhibiting the company from consolidating Moema’s operations in 2015 financials. This accounts for the ~$70 million in 2015 revenue guidance falling drastically short from our and consensus estimates (we were at $350 million previously for 2015).

Management has noted that despite delays, it expects to fully bring Moema onto its balance sheet in 2016, albeit not producing at the previously intended annual capacity of 100k MT/yr. We expect the Moema run rate to fall short of 20k MT/yr by 2016, given the change in strategy, as well as a pause in the completion of the Clinton facility ramp. This could prove ultra conservative; however, we would rather set the bar low.

Meanwhile, Mike Ritzenthaler of Piper Jaffray was trying out for Les Miserables. He wrote:

Start-up & reliability issues, the slower pace of market adoption, and lower than expected ASPs have substantially delayed execution timelines; management used the conference call to reset investor expectations much lower. Even with the technology working as expected, the timeline needed to ramp the facilities (including Moema which is currently experiencing operational issues) is well beyond previous expectations. The business model shift toward value products versus volumes is not surprising, but we continue to see material risk from niche market development and a sizeable capacity overhang (new partner Versalis is targeting ~3k MT of Encapso sales, or ~2.5% of capacity). Further, we see a capital infusion in 1H15 as likely and no longer believe that cash break-even in FY15 is reasonable. We have made healthy cuts to estimates, which result in a lower price target (to $2 from $4) and we maintain our Underweight rating.

The anatomy of the stock’s free-fall

You can see it right here. The news came out last night, and there was a huge imbalance in the buy-sell. The stock was routed before trading started, opening at $3.85, and falling throughout the day to a intraday low of $2.98 before rebounding to $3.14 at the close.


We’ve seen it before. Pounding of earlier-stage stocks for any delays in the march to break-even. Doubtless we’ll see it again.

Those are timing issues for investors — and legitimate for their purposes, of course. But let’s focus on the larger story here — while significant ramp-up risk is out there for the long-term, investors have priced in almost zero revenue growth next year, at this stock price, if we take the Cowen & Company analysis which pegged a $4 target price to 15% growth.


Which makes this an opportunity for those who see in the Eni deal the means of revenue growth that investors have discounted for the near-term.

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

November 07, 2014

Will Falling Oil Prices Destroy Tesla?

By Jeff Siegel

Oh my God! Oh my God!

Saudi Arabia cut oil prices and crude fell all the way to $75.84 today.

Sell it, dump it, run for the hills!

How far will it go? No one knows. But hold on to your asses, because things are going to get crazy!

We're awash in oil, demand is waning, the Saudi plan to wipe out the U.S. shale market is underway.

Gas prices will fall back to $2.00 a gallon, everyone will be happy, gas-guzzlers will make a comeback, and electric cars are dead in the water. Take that you stupid treehuggers!

Saudi Supply

As you know, I hate low oil prices.

Low oil prices equate to lower gasoline prices. Lower gasoline prices chip away at the economic case for owning an electric car. As it is, that case is still a bit flimsy and will remain that way for a few more years until the Tesla (NASDAQ: TSLA) gigafactory starts pumping out cheaper batteries.

That being said, low oil prices are not a death sentence for electric cars – despite a lot of wishful thinking from those who have cursed Elon Musk since proving to the world that an electric car can be more than a glorified golf cart.

First, consider that the Saudis cannot shoulder price cuts for an extended period of time.

Saudi Arabia has its own economic issues to deal with, including some pretty burdensome unemployment rates. Back in 2012, King Abdullah actually announced a $130 billion plan to create jobs, build subsidized housing and support the religious establishment that backed the ban on domestic protests.

Some have suggested this outflow of capital was used as a way to maintain the status quo during the Arab Spring. I don't know whether or not that's true, but the Saudi economy is an oil economy. And while the Saudis are competing against the U.S. shale revolution, they must also balance those efforts with their plan to use less of their fossil fuel resources for their own consumption so they can sell them abroad at higher prices.

This is why we've seen such a big push for nuclear and solar power development in Saudi Arabia.

In any event, don't count on the Saudis for a long-term supply of cheap oil.

Supply and Demand

Second, consider demand.

Demand is falling, and will likely continue to fall for some time. The global economy is not rebounding as fast as some claim, and increases in fuel economy for U.S. cars and trucks are having a small, but noticeable impact.

That being said, in the absence of another global economic meltdown (which isn't out of the question), I suspect demand will pick up steam again in a few more years.

Above $70

Even if demand does remain stagnant, most shale producers can't frack for less than $70 a barrel. Because the U.S. economy is so directly tied to the price of oil, and because the U.S. government is so reliant upon royalties from oil production, I find it hard to believe that the state won't devise a plan to manipulate the price of oil in an effort to keep it above $70.

Of course, I don't have a crystal ball. And maybe I'm wrong. Maybe I'm just full of crap and I'm doing little more than picking at straws here. But for the sake of electric vehicle adoption, I'm not even so sure cheap oil even matters.

Perhaps it does more for the less expensive electric vehicle models, like the Nissan LEAF for instance. Which, incidentally just broke its own record for most electric cars sold in the U.S. in a single year. To date, Nissan has sold more than 66,500 LEAFs in the United States.

But for a company like Tesla, it's not entirely relevant.

Folks who can shell out $85,000 for a Tesla Model S don't tend to be the types who worry about the price of gas. These are innovators and early adopters. They chest pound over access to new technologies and love nothing more than to show off their shiny new toys.

You also have environmentalists who will happily forgo cable or financial security in exchange for an emissions-free vehicle.

Point is, Tesla is at no risk of being sideswiped by cheap oil. The company is a beast, and even if it craps the bed on Q3 earnings tomorrow, it's not going away. Tesla is here to stay. It's going to continue to disrupt the hell of the auto market, and no amount of Saudi influence, state manipulation or demand destruction in the oil space will change that.


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

November 05, 2014

HydroPhi: Turbocharging Trucks With Hydrogen

by Debra Fiakas CFA

Casting about for alternatives to burning fossil fuels for energy, hydrogen is a logical candidate.  It is the most abundant chemical on the planet and the energy density of compressed hydrogen is about 5.6 milli-joules per liter.  This compares to 32.4 mj/l for gasoline and 4.3 mj/l for a lithium ion battery.  That is where the romance ends and the realities of hydrogen begin.  Hydrogen poses a safety risks, particularly in transportation and distribution.  Hydrogen gas leaking into the air may spontaneously ignite.  Extremely low temperatures will turn it into a liquid, but that represents added cost.  Furthermore, the most common production method for hydrogen is steam reformation of natural gas, which hardly represents an alternative to fossil fuels.

Included in our novel renewable energy data base is a very small group of companies attempting to develop technologies to produce hydrogen using an alternative methods not dependent upon fossil fuel.  Water molecules are subjected to direct current that leads to a chemical reaction and the separation of the hydrogen and oxygen elements in water.   One of the most recent additions to the group Hydrogen Electrolysis in the Mothers of Invention Index is HydroPhi Technologies Group, Inc. (HPTG:  Other OTC). 

HydroPhi is trying to turn distilled water into a hydrogen-based catalyst for engines using fossil fuels.  The catalyst is injected into the air intake of the engine to improve fuel efficiency and thereby reduce greenhouse gas emissions.  HydroPhi’s electrolysis system is right on-board the vehicle, thereby avoiding the thorny transportation dilemmas.  The company has planned a demonstration project in Poland for heavy duty trucks.

Earlier this week HydroPhi received good news from the European Union’s LIFE Program for environmental protection and water conservation.  The program has given preliminary approved a grant for 577,813 Euros or about US$722,000.  HydroPhi needs approximately $1.3 million to complete the demonstration.  Success with the project should take HydroPhi one step closer to commercialization of its hydrogen fuel catalyst system.

HydroPhi is a very early stage company that is still using cash resources to support development work.  In the most recently reported twelve months, the company used $741,250 to support operations.  It only had $111,730 on the balance sheet at the end of June 2014, revealing the HydroPhi really needs the money from the grant to carry out the demonstration project in Poland.

HPTG trades for just one penny and the market cap of the company is $1.4 million.  Investors interested in the potential in hydrogen could consider the stock as a very inexpensive option on the idea of making it possible for truckers to drive around with their very own hydrogen plant under the hood of their truck.  Pay-off is probably a couple years down the road (no pun intended).  

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

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

November 04, 2014

Bureaucratic Roadblocks To China's EV Plans

Doug Young

Bottom line: Bureaucracy at the homeowner level is providing a major obstacle to China’s ambitious new energy vehicle build-up plan, with new government directives unlikely to fix the problem.

A new report is showing just why new energy vehicles are failing to gain any traction among Chinese consumers, despite huge government efforts to promote the technology. The main culprit in this case is the country’s huge bureaucracy, which affects everything from the largest government programs all the way down to something as simple as installing a vehicle charger in an apartment building.

In most western cities, the installation of an electric vehicle (EV) charger at a person’s home would be a simple matter, involving a visit from a specialist to hook up the proper equipment. Apartments could be slightly more complex though still manageable, since they would involve modifications at collectively owned buildings. But in China, where most people live in apartments, the bureaucracy of installing chargers in such buildings rises to a whole new level, creating a major obstacle that’s unlikely to go away anytime soon.

The new report in the English-language China Daily starts with some sobering figures involving license plates for electric vehicles (EVs). (English article) Unlike the west, license plates in major Chinese cities like Beijing and Shanghai are quite expensive and often cost $10,000 or more, due to auction and lottery systems used to control the number of new plates entering the market. In a bid to encourage EV ownership, big cities have begun awarding new license plates for those cars at much lower prices.

Beijing launched its system in February and named an initial batch of 1,424 license winners. And yet some 980 of those — or 70 percent of the total — ultimately forfeited their rights to those licenses after failing to actually purchase an EV by an October 26 deadline. Of the people who gave up their licenses, more than half said they did so because there was no realistic place for them to charge their vehicles.

Welcome to the world of Chinese bureaucracy, where something as simple as installing a vehicle charger takes on new meaning in terms of complexity. Anyone who lives in China knows that most buildings have neighborhood committees that tightly control what can and cannot be done on the premises. Added to that are an additional layer of management companies at most newer buildings, which are often reluctant to do anything that could upset the status quo and draw attention from nearby police or neighborhood committees.

The result of all this bureaucracy is a state of gridlock at most buildings, whose managers suddenly become paralyzed when confronted by a resident who wants to do something revolutionary like install a vehicle charger in their parking space. Adding to the issues are the complexity of fees for electricity, since separate metering systems would have to be set up to charge individual residents for the large amounts of power their EVs consume.

In its usual authoritarian style, the Beijing city government is trying to fix the problem by ordering all new buildings in the city to install charging outlets in 18 percent of their parking spaces. That kind of target-oriented approach is typically Chinese, and leads companies and individuals to look for creative loopholes to officially meet the targets without actually advancing the real objective of the goals.

None of this bodes well for China’s EV program, and looks especially troublesome for most domestic names like BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF), SAIC (Shanghai: 600104) and Geely (HKEx: 175), which were pinning their new energy hopes on eventual demand from mainstream consumers. Even high-end producer Tesla (Nasdaq: TSLA) is showing some strains, as reflected by its recent program to build more charging stations. But at the end of the day a niche player like Tesla should feel less impact, since many of its affluent customers have the resources to make sure chargers get installed in their homes.

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

November 03, 2014

Earnings Season For The BioEconomy: Novozymes, Green Plains & Pacific Ethanol

Jim Lane 

In the first half of November we will be hearing from a slew of companies regarding Q3 earnings — but earnings season is well underway already, and we have good indicators from the likes of Novozymes, Clariant, BP, Pacific Ethanol and Green Plains about the overall environment for energy, speciality chemicals, industrial biotechnology — and specifically, biofuels.

Let’s take a look.

Novozymes-logoIndustrial biotechnology — robust growth at Novozymes.

Also this week, Novozymes (NVZMY) announced 9% organic sales growth for Q3 and 8 percent growth for the nine months of 2014 to date. The company is saying that growth is “broadly based” but highlighted that sales in Household Care and in the bioenergy business have been growing in line with expectations.

Outlook: In comments on the earnings call as reported by Seeking Alpha, CFO Andy Fordyce said that China “provides some headwinds” with “more competition” but described bioenergy as the “brightest star this year” with “23% organic sales growth” this year to date. Fordyne noted that the “U.S. ethanol market product is up around 10% this year so far” and alluded to “new innovation” in the “bioenergy pipeline” within the next six months.

SVP Thomas Videbæk highlighted the opening of celluloisc next-gen plants by Abengoa, GranmBio and POET-DSM as expected, but still great to see” and noted that upgrades at the Beta Renewables’ Crescentino “have started to contribute to higher production volumes” and that “Capacity utilization is increasing” while hailing Italy’s 1% advanced biofuels mandate. But Videbæk said that Crescentino is not yet running at full capacity though Novozymes remains “confident we’ll get there.”

He added that it has been “a significant ramp of time for Crescentino” and stated that “we certainly hope that the other ones will be able to do it faster.”

In looking at the company’s planned target of 15 biomass conversion plants by 2015, Videbæk described the target as “a very challenging and ambitious target” but did not back down from the target, saying that “There’s no indication that this is no longer possible,” while conceding that “It’s not going to be a walk in the park.”

On the 15 by 17 target, CEO Peder Holk Nielsen added that “it’s going to depend a lot on how many new investments goes into these plants in 2015.” On E15, CFO Benny Loft commented that on E15, “we certainly must commit or say that it’s really difficult to see where the E15 – when it will come.”

On the impact of US elections, CEO Nielsen commented that “there’s some risk around the U.S. midterm election and that will create a different mood around bioenergy in the U.S.” He also said that the company is watching for “a potential slowdown in Europe and the emerging markets.”

green-plainsEthanol — big earnings growth at Green Plains

In Nebraska, Green Plains (GPRE) announced its financial results for the third quarter of 2014. Net income for the quarter was $41.7 million, or $1.03 per diluted share, compared to net income of $9.4 million, or $0.28 per diluted share, for the same period in 2013. Revenues were $833.9 million for the third quarter of 2014 compared to $758.0 million for the same period in 2013.

During the third quarter, Green Plains had record production of 246.9 million gallons of ethanol, or approximately 96% of its daily average production capacity. Non-ethanol operating income from the corn oil production, agribusiness, and marketing and distribution segments was $22.2 million in the third quarter of 2014 compared to $14.2 million for the same period in 2013. Non-ethanol operating income for the nine-month period ended September 30, 2014 was $79.9 million compared to $52.7 million for the same period in 2013.

Revenues were $2.4 billion for the nine-month period ended September 30, 2014 compared to $2.3 billion for the same period in 2013. Net income for the nine-month period ended September 30, 2014 was $117.3 million, or $2.90 per diluted share, compared to net income of $17.9 million, or $0.56 per diluted share, for the same period in 2013.

For the nine-month period ending September 30, 2014, EBITDA was $260.0 million compared to $92.7 million for the same period in 2013.
The earnings took Wall Street by surprise, with Zacks Investment Research reporting a consensus Street estimate of 89 cents — so a 12% beat. However, Zacks reported a consensus Street expectation of $987.2M, with the company dragging in $833.9M — so a 15% miss there. Obviously a huge swing in margin — 5% margin delivered compared to Street expectations of 3.7%.

CEO Todd Becker commented, “U.S. ethanol production margins continue to reflect strong demand, both domestically and globally. As a result of this environment, we are reaffirming our mid-year guidance of stronger earnings per share performance in the second half of 2014,” added Becker.

Green Plains had $414.3 million in total cash and equivalents and $167.7 million available under committed loan agreements at subsidiaries (subject to borrowing base restrictions and other specified lending conditions) at September 30, 2014.

peixConfirming the ethanol trend – Pacific Ethanol reports record gallons, big growth in revenues, earnings.

In California, Pacific Ethanol (PEIX) reported net sales of $275.6M, an increase of 18%, compared to $233.9M for Q3 2013. The company’s increase in net sales is attributable to its record total gallons sold resulting from increases in both production and third party gallons.

Gross profit was $18.0M, compared to $3.5M for Q3 2013. The improvement in gross profit was driven by significantly improved production margins and corn oil production. Operating income was $13.6M, compared to $1.0M for Q3 2013. Net income available to common stockholders was $3.7M, or $0.15 per diluted share, compared to a net loss of $0.40 loss per share for Q3 2013.

CEO Neil Kohler noted: “We delivered solid financial results for the third quarter of 2014, supported by efficient operations and continued strong ethanol market fundamentals.” CFO Bryon McGregor, added: “Since December 31, 2013, we increased our cash balances by over $51.1 million. As a result, our working capital increased to approximately $93.3 million from $51.2 million at the end of 2013.”

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

November 02, 2014

Ten Clean Energy Stocks For 2014: Spooky October

 HalloweenOctober was a spooky month for clean energy stocks.  My benchmark Powershares Wilderhill Clean Energy Index (PBW) cringed down 2.9% like the young Supergirl who jumped when a mechanical ghost startled her at my door Haloween night.   My 10 Clean Energy Stocks for 2014 model portfolio was more like Supergirl's slightly older brother, who was dressed as a SWAT team member and insisted that he wasn't scared: It rose a slim 0.9% since the last update on October 3rd.  For the ten months since I launched the portfolio on December 26th, PBW is down 2.6% while the model portfolio is up 2.4%

Meanwhile, the broader market of small cap stocks clawed its way out of a premature grave, digging its way up 6.3% for the month to end up 2.1% (as measured by the Russell 2000 index ETF, IWM.) 

Individual Stock Notes

The chart and discussion detail the performance of individual stocks in the 10 Clean Energy Stocks for 2014 model portfolio, along with relevant news items since the last update.
performance chart

(Current prices as of October 31st, 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: $1.04.
Current Price: $13.98.  YTD Total US$ Return: 5.7

Last month I predicted Sustainable Infrastructure REIT Hannon Armstrong would raise its fourth quarter dividend to 24¢ from 22¢.  I was too conservative.  In conjunction with the announcement of a $144 million investment in ten operating wind projects, President and CEO Jeffrey Eckel stated: "This investment should enable us to achieve core earnings of $0.25 in the fourth quarter and, in anticipation of further 2015 earnings growth, to support the declaration of an increase in our December dividend to $0.26 per share."

The stock rally from the increased dividend was cut short a week later when the company announced a secondary equity offering of 4.6 million shares at $13.60, for gross proceeds of $63.56 million.  The company has a target leverage ratio of 2:1 debt to equity, and since the company has not raised equity since $70 million (at $13.00/share) in April, this smaller offering should have come as no surprise. 

The stock pull-back in response to the equity offering should be seen as a buying opportunity.  At $13.89, the company's forward yield is 7.4%, and this dividend was achieved by investing the roughly $10/share raised in the IPO and April offering. Any money raised at $13.60 a share should increase both book value per share and per share dividend once it is invested.

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$3.98. YTD Total C$ Return: -14.2%.  YTD Total US$ Return:

Green building company PFB continued to decline until October 30th, when the company announced its third quarter results.  Earnings per share increased to C$0.23 from C$0.14 in the third quarter of 2013, along with a 7% increase in revenue and an increase in gross margin.  Full financial statements for the quarter will be filed on or before November 14th.

The company announced its regular 6¢ dividend, payable to shareholders of record on November 14th.  This amounts to a 6% annual dividend at the $4 current price.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).

12/26/2013 Price: C$3.55.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.27.  YTD Total C$ Return: 30.8%.  YTD Total US$ Return: 24.4%

Independent power producer Capstone Infrastructure will release third quarter results after the close on November 11th.

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 (suspended pending buyout.)
Current Price: C$5.82.  YTD Total C$ Return: 22.3% .  YTD Total US$ Return: 16.3%

Waste heat recovery firm Primary Energy Recycling rallied on the news that the board's strategic review had resulted in a buyout offer from a group of investors led by Fortistar at US$5.40 per share.  The deal seems very likely to win shareholder approval, since it has the unanimous approval of the board, and investors controlling 44.5% of common shares are subject to a lock up agreement to vote their shares in favor of the deal.  Only 66⅔% of outstanding shares is needed to approve the deal.

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: €12.73. YTD Total 
Return: -2.3% .  YTD Total US$ Return: -10.9% 

SNS Securities increased its price target for Netherlands based bicycle manufacturer and distributor Accell Group from €13 to €14, but the stock posted a small decline along with European stocks in general. 

Accell continues to integrate last year's acquisition of Raleigh, which will now distribute its Dutch-based Koga brand in the UK.  Its Sparta brand sold its 1000th speed pedelec (an electric-assisted bike with unrestricted top speed which must be registered as a motorized vehicle) in October. Sparta leads the accelerating Dutch market for speed pedelecs with roughly 60% of the market.

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$13.00.  YTD Total C$ Return: 27.6% .  YTD Total US$ Return:

Leading transit bus manufacturer New Flyer made headlines with its delivery of two fully electric buses to the Chicago Transit Authority.  The purchase shows that fuel savings alone do not yet support purchase of electric buses by transit agencies, as they cost $400,000 more than conventional diesel buses, but will save approximately $300,000 in fuel costs over their 12 year lifetime.   However, they deliver other benefits such as no exhaust (a benefit to anyone standing or driving behind them), a smoother and quieter ride for passengers, and likely lower maintenance costs.

The company will announce its third quarter results on November 5th and hold a conference call on November 6th.  It paid its regular monthly dividend of C$0.0475.

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64.  Low Target: $8.  High Target: $16.
  No Dividend.
Current Price: $8.24  YTD Total US$ Return: -14.5%.

The stock of energy performance contracting firm Ameresco recovered 11% from previous lows, but remains down for the year. Part of the jump was likely the result of a series of transactions by the new New York Green Bank which will provide funding for the types of projects Ameresco specializes in.  The announced projects have a large number of financial partners, but the only developers were Ameresco and privately held BQ Energy.

I also expect that the October rise is partly in anticipation of likely positive third quarter results and outlook.  The second quarter was the first relatively upbeat conference call after a series of disappointments starting in 2012.  If the third quarter outlook (to be announced on November 6th) is also upbeat, expect the climb to continue this month.

8. Power REIT (NYSE:PW)
12/26/2013 Price:
$8.42.  Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $10.12 YTD Total US$ Return: 20.2%

Solar and rail real estate investment trust Power REIT and its opponents Norfolk Southern Corp. (NYSE:NSC) and its sublease Wheeling & Lake Erie Railway filed responses to each others motions for summary judgment in their civil case.  The filings can be found on the Power REIT website.

Both a litigation researcher on Seeking Alpha and I think the case may be nearing a finish, and we published our analyses virtually simultaneously.  My analysis is here, and a more pessimistic view by a new anonymous author is here.  The author, "Small Cap Litigation Research" or SCLR claims not to have a position in the stock (I am long) and I feel he or she missed several subtleties of the very complex case despite a legal background.

To summarize the article, SCLR believes that

  1. Power REIT's attempt to discount the performance of the lease in its interpretation is unlikely to succeed.
  2. NSC is demonstrating its confidence by continuing to omit the lawsuit as a legal risk in its SEC filings.
  3. At the current price of $10, current shareholders are betting on a windfall profit.

I'll take each of these points in turn.

1. Performance under the lease.

Since I'm not a legal expert, I don't have an opinion on how relevant the performance of the parties over the last 50 years will be to the judge's decision.  Even if SCLR is correct that performance is very relevant to the interpretation of the lease, there are many possible defaults under the lease to which performance is irrelevant because they have not come up previously.  In particular, the lease provides that the lessees pay legal expenses which are "necessary or desirable" for the maintenance of PW's interest in its property, so long as these expenses are "not for the sole benefit of its shareholders."  Since the lessees have paid some legal expenses in the past, this part of the case (which could lead to total default under the lease) rests not on performance, but on the court's interpretation of what is for the "sole" benefit of shareholders, and what is "desirable."  I discuss in my article why Power REIT's case seems strong in this regard. 

Another possible default under the lease to which performance is not relevant would be WLE's sale of mineral rights, which are not explicitly conveyed by the lease.  PW only became aware of this over the course of the lawsuit, so could not have previously acquiesced to such sales.

2. NSC's apparent confidence.

SCLR fails to distinguish between NSC and WLE.  While it is true that NSC has not disclosed this lawsuit in the legal risks section of any of its SEC filings, it is WLE, the sublessee, which will be responsible for paying the majority of any award.  As I discussed in an article linked to by SCLR, the sublease agreement limits NSC's liability to the $7,466,951.42 balance of a "settlement account" described in the lease as of the closing date of the sublease agreement.  This liability is most likely already disclosed on NSC's books as long term debt.  Given its tiny size relative NSC's $34 billion market cap, the outcome of the lawsuit would only be material to NSC if the judge were to award back interest on the settlement account.  In my judgment, NSC is probably correct in its confidence that back interest will not be awarded, and so the results of the case are not likely to be material to NSC.  I still believe NSC should be disclosing the lawsuit despite its confidence, accompanying the disclosure with a statement that the chances of the lawsuit resulting in a material liability to NSC are low, if that is the opinion of management.  The intent of such disclosures is not to predict what will likely happen, but rather to disclose what might happen..

WLE, on the other hand, is potentially responsible for more than half of the $16 million balance of the settlement account, PW's legal bills, may be forced to renegotiate the lease if it is found in default, and has a chance of owing back interest as well.  While these potential liabilities are certainly material to WLE, the company is privately held and so has no responsibility to make public statements about the lawsuit. 

Hence, NSC's apparent confidence is only relevant to the possibility that back interest might be awarded, and has no bearing on most of the matters of contention.

3. Are investors betting on a windfall?

Neither SCLR nor I provided a valuation of PW in our articles, so it is difficult to judge from them if shareholders are betting on a windfall profit.  I did however, provide a back-of-the-envelope valuation in response to a comment.  I responded,

PW has about $1.9 million in annual revenue from its leases (Rail and Solar.) Recurring expenses are about $0.8M, including interest, so we have about $1M to pay dividends each year. As of the end of June (the last 10Q), there were 130,000 preferred outstanding, with an annual dividend of $0.25M. That leaves $0.75M to pay dividends on 1.73M common shares, or 40-45 cents a share.
If PW lost, they would write off the settlement account, meaning that dividends would become classified as return of capital for the next 16 years or so. The ending of the lawsuit would also remove uncertainty, and allow Lesser to resume the yieldco business plan as well as make it easier to refinance the debt used in the solar acquisition. So the answer to your question depends on what you think the market would pay for a stock with a 40 cent annual return of capital dividend (i.e. deferred income taxed at the LT cap gains rate) and some potential for growth.  I personally would be happy to buy such a stock at a 5% yield (the cheapest yieldcos trade at 4%), which would be $8 to $9, but it would probably fall below $8 in the short term, especially since the dividend would not be resumed until unpaid attorneys fees had been paid off. Those will probably amount to $2 million or so, so the dividend would likely remain suspended for 3 years. Hence, we should discount back my $8 estimate by 3 years at something like 15%, which also gives me a $5 downside.
My best guesses on the probabilities of various outcomes and valuations are:
  • 25% - PW loses on all counts - $5
  • 40% - PW collects a portion of settlement account and legal fees - $10
  • 30% - PW collects entire settlement account & legal fees - $15
  • 5% - PW collects legal fees, settlement account, and also has upside from renegotiating lease and from some asset sales or interest not included in NSC/WLE version of settlement account - $20+
The weighted average of these outcomes is $10.75.
If my estimates are correct, shareholders are only betting on a mixed result to the lawsuit, which I gave a 40% likelihood among the scenarios I evaluated.  

In summary, the flaws in SCLR's analysis all of favor the lessees over PW.  SCLR claims to have no position in the stock, which could be the reason for a lack of diligent research.  Another possibility is that the writer is actually short the stock, and is looking to profit from a decline caused by the article.  If that is the case, SCLR is unfortunate that we were working on our articles simultaneously.

  9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price:
$12.17.  Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $8.91. YTD Total ZAR Return: -21.6%. YTD Total US$ Return:

South Africa based global provider of software as a service fleet and mobile asset management, MiX Telematics will announce its fiscal second quarter 2015 results on November 6th.

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$0.32   YTD Total C$ Return: 14.3% .  YTD Total US$ Return: 8.6%.

Renewable energy developer and operator Alterra Power completed the construction financing for its 62 MW Jimmie Creek run-of-river hydroelectric expansion in conjunction with its development partner, Fiera Axium.  The company will announce its third quarter results after market close on November 12th.


Although October spooked many clean energy stocks, my model portfolio did not take fright.  Hannon Armstrong's larger than expected dividend increase, and the announcement culmination of Primary Energy's strategic review helped keep the ghosts at bay.  I included both in the list because I knew these positive events reasonably likely, and am glad they came at such an opportune time.

Disclosure: Long HASI, PFB, CSE, ACC, NFI, PRI, AMRC, MIXT, PW, AXY, FVR, FF.  

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

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