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July 31, 2015

Underpriced JA Solar Becomes More Undervalued

by Shawn Kravetz

In the second quarter, solar stocks were impacted by broad energy sector declines on global macroeconomic concerns (most notably Greece and China). This negative sentiment has continued unabated into July exacerbating the disconnect between fundamentals and perceptions.

JA Solar (NYSE: JASO) epitomizes this dislocation.

We at Esplanade Capital Electron Partners (ECEP) owned JA Solar prior to June 5, believing the company to be worth ~30%+ more than the share price.

On June 5, JA Solar received a takeover offer from its Chairman/CEO and parent company at a 20% premium.

After a short-lived, modest rally, the shares have fallen to levels below where they were trading prior to the takeover offer.

We have added to this position, and while we continue to assess the deal and market risks, we remain confident that JASO will yield a 33% return in roughly six months when we expect the deal to close.

JASO ECEP.png
 
JA Solar represents but one example of our robust portfolio whose potential upside continues to grow as the dislocation between fundamentals and market perception expands.

Shawn Kravetz is President and Chief Investment Officer of Esplanade Capital LLC,
an investment management company he founded in 1999.  The firm manages private investment partnerships including Esplanade Capital Electron Partners LP, launched in 2009, which intends to be the world’s premier private investment fund dedicated to public securities in solar energy and those sectors impacted by its emergence..
 

July 30, 2015

GE's Energy Storage Restart

by Debra Fiakas CFA

A few years ago General Electric (GE:  NYSE) built out a manufacturing facility in Schenectady, New York for its sodium-ion batteries.  CEO Jeff Immelt declared the company a contender in the energy storage industry.  He projected that the company could ring up $500 million in annual sales by 2016, and build to $1 billion a year by 2020 by providing energy storage to utility-scale alternative energy projects.  Reality has been a bit different than Immelt's vision.  GE ended up shuttering the plant in the Fall 2014, and all but fifty employees were finally laid-off or reassigned in early 2015. 

GE’s foray into the energy storage market appeared to be over before it began.  Energy industry watchers began an autopsy on GE’s sodium-nickel-chloride battery chemistry that had been used in large train batteries.  Others focused on the poor economics of distributed solar and wind power compared to the persistently low prices for centralized natural gas powered power plants.

Then to my surprise, what did I see on GE’s web site in early July 2015  -  recruiting notices for forty-eight new jobs in Schenectady, New York!  Is this GE’s restart in the energy storage industry?


Indeed, GE is looking for a mix of new employees to work at its battery production facility in positions such as ‘senior electrical engineer’ and ‘energy storage engineer.’  There are some administrative job openings as well.
It appears GE never left the energy storage market.  Instead, it seems leadership took a ‘practical’ pill.  In April 2015, the company won a contract to supply Con Edison Development with an 8-megawatt-hour battery storage system at a solar project in California.  The system will incorporate GE’s Mark IVe control system, GE’s Brilliance MW inverters and GE’s performance guarantees (possibly the most important feature).  What the system will not include is GE’s Durathon sodium-ion batteries.  GE will be outsourcing or acquiring lithium-ion batteries for the projects.

On a roll with its new approach to the energy storage market, GE won an order in May 2015, to supply a 7 megawatt-hour battery storage system for the Independent Energy System Operator in Ontario, Canada.  Convergent Energy + Power is the system integrator.  The batteries will be lithium-ion technology.

GE’s spokespersons have been careful to support the company’s Durathon battery, maintaining it will still have a place in GE’s energy storage business.  Durathon batteries are installed at an operational wind farm in Mills Country, Texas. Southern California Edison is also incorporating Durathon batteries in a field demonstration of a permanent load shifting application.  Princeton Power Systems is the integrator of the project, which is located near Santa Anna, California.

Where will GE source the lithium-ion batteries for the California and Ontario projects?  So far, spokespersons have been non-committal on the name.  GE has had many bedfellows in the energy industry over the years  - some strange and a few obvious. 

In the next few posts, we will look at both the strange and the obvious in lithium-ion battery storage.

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.

July 28, 2015

SunEdison Spinning Yieldcos

by Debra Fiakas CFA

Two weeks ago TerraForm Global, Inc. filed yet another amendment to its S-1 registration statement as the SunEdison, Inc. (SUNE:  NYSE) spinout grinds forward with its initial public offering.  TerraForm is a collection of SunEdison’s renewable energy properties, primarily its solar, wind and hydro-electric power generation facilities around the world.  The current portfolio sums up to over 1,400 megawatts in total generating capacity, of which over 900 are spoken for through power purchase commitments that cover the next 19 years.    On a pro forma basis, the assets produced $298.9 million in total revenue, providing $44.1 million in net income.   

This will be SunEdison’s second spinout of renewable assets.  TerraForm Power, Inc. (TERP:  NYSE) was spun out of SunEdison a year ago, gaining 48% from its IPO price of 25%.  Even at its present elevated price, the stock offers a dividend yield of 3.3%.  The success of SunEdison’s first ‘yieldco’ is likely to influence the pricing and trading of the international properties now up for grabs if the SEC can be appeased.

SunEdison has been the premier acquirer of renewable energy projects.  Its reputation precedes it, opening doors and priming negotiations.  A central point of the case for Terraform Global is the existence of over 600 gigawatts of power generating capacity that the company apparently considers fair game for adding to the portfolio.  Seven acquisitions are already in the pipeline, representing 921.7 megawatts of generating capacity. 

SunEdison is projecting 32% compound annual growth over the next five years for Terraform Global and expects to have $231 million in cash available to distribute as a dividend in 2016.  Projecting cash generation in the next year is relatively easy given all those power purchase agreements that lock in sales levels and pricing.  However, in predicting high double digit growth for the next five years, SunEdison could be out on the proverbial limb.

Indeed, with big numbers like 32% growth etched into the prospectus, do not be surprised if Terraform Global debuts at a health multiple of earnings  -  a multiple that might be sustainable if growth fails to materialize.  Thus it might be wise to wait for the stock to mature a few weeks before jumping into long positions.  I note that the ‘big sister’ Terraform Power closed near $32.00 on its first day of trading, but within three months had skidded below its offering price.  This presented an interesting window of opportunity to access shares at compelling prices.  It will be worthwhile watching this new IPO for similar developments.  

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.

July 21, 2015

NRG Wants To Charge Your Car

by Debra Fiakas CFA

New Jersey-based NRG Energy, Inc. (NRG:  NYSE)  NRG serves about 2.8 million customers in the northeastern U.S. with electricity generated from a mix of conventional and renewable power sources  - 95 fossil fuel and nuclear power plants, 14 utility-scale solar power plants, and 35 wind farms.  It has been good business for NRG, raking in $16.2 billion in total sales in the twelve months ending March 2015.  NRG converted $1.4 billion of those sales to operating cash.  That helps support a dividend payout policy that will put $0.58 per share in holders’ pockets next year.

NRG wants to be more than the ordinary electric utility, powering lights and appliances.  The company is trying to serve electric vehicle owners with its EVgo in-home charging units.  NRG has also set up a network of stations for away-from-home charging called EVgo Freedom Stations.  The company claims 'hundreds" of stations and that it "continues to expand nationally."  Some are located along major highways, but most are in parking lots adjacent to major retailers.

To establish its footprint in the electric vehicle charging market, NRG is offering free charges at its Freedom Stations to owners of Nissan LEAF electric cars.  The company also provides a selection of charging plans to win loyalty from electric car owners.  Its pitch for in-home charging units is pinned to a promise of no up-front costs and payment plan choices to fit the car owner’s budget.

For conservative investors who cannot stomach the risks inherent in the small, early-stage car charging companies described in the last post, NRG presents an interesting alternative.  Of course, a stake in NRG is really a play on electricity generation and distribution and not a pure play on electric car charging.  However, as garages become increasingly homes to electric vehicles, the growth opportunity presented to electric utilities cannot be overlooked.  With the EVgo brand, NRG seems to have a head start in capturing the electric car charging opportunity.

NRG will not be a cheap play at least in terms of price-to-earnings multiples.  The stock is currently trading at 65.4 times the consensus estimate for 2016.  However, there appears to be quite a bit of noise in EPS.  Thus multiples of assets or cash earnings might be more helpful.  It is also worthwhile noting that NRG has been in a slump in recent weeks and the stock looks enticingly oversold near its 52-week low.

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.

July 19, 2015

Plugging Into Car Charging Stocks

by Debra Fiakas CFA

Earlier this week, the quieter half of Tesla Motors (TSLA:  Nasdaq) founding team and the company’s chief technology officer, JB Straubel gave a speech at a solar energy conference in San Francisco.  He is largely responsible for Tesla’s innovative battery technology, so it should be no surprise that he thinks that eventually all vehicles will be powered by batteries.  As profound a this view might seem, let’s remember that if hammers could see, the world would look like a nail.
Nonetheless, I thought it worthwhile to take Straubel at this word.  This is a man who is building a factor big enough to produce a half million batteries per year to charge Tesla all-electric car.  Yet, batteries only provide a solution to store energy for on-demand use in  the vehicle.  Once that energy has been depleted, the battery and the car are stranded alongside the road.

Is there an investment opportunity in electric car charging?

According to the Electric Driver Transportation Association (EDTA), at the beginning of 2015, there were approximately 286,000 electric cars on the road.  It does not seem like many cars.  To bring the total into perspective, it is important to know that 118,773 electric cars were sold in 2014 alone, and that was 35% more than the year before.  Thus the private electric car base in the U.S. remains small, but it is growing at a fairly rapid pace.

Tesla’s cars represent about 20% of the electric cars on the road in the U.S., based on a comparison of Tesla’s public filings and the EDTA car census.  Tesla provides its customers with a free charging at its SuperCharger stations and brags about the freedom Model S drivers have to roam the entire continental U.S. for free.  It is not so simple for the rest of the drivers sitting behind the steering wheels of a Nissan Leaf (at least 150,000 on the road) or a Chevrolet Volt (75,000) or Toyota Prius PHEV (61,000), among others.  There are home charging units available and likely most electric car owners plot out a charging strategy for home, work and local shopping situations.  The trip to the beach or visit to grandma might still be problematic. 

There are several companies already trying to speed electric car drivers to their destination.  I take a look at three of them here.

Privately-held ChargePoint operates the largest network of electric vehicle charging stations, with sites in the U.S., Europe and Australia.  The company claims over 22,300 charging locations in operation.  Building this network has been a culmination of a long list of partnerships with parking facility owners, employers and municipalities as well as alliances with electric car manufacturers.  This large network has required capital.  ChargePoint last came to the capital market in May 2014, when it raised $22.6 million in new funding.  The deal brought the company’s total capital raised to $110 million, which appears to have come from a mix venture capital firms like Kleiner Perkins Caufield and Rho Ventures as well as from strategic investors such as BMW.

Car Charging Group (CCGI:  OTC) has gobbled up a couple of other companies with car charging technologies and networks  -  Blink and Ecototality.  The acquisitions have given Car Charging the beginnings of a nationwide network.  While the company makes much of its cooperative agreements with major retailers and employers such as IKEA, Walgreens, Walmart and the Mayo Clinic, it has not disclosed an updated number of charging stations available to the public.  A recent partnership with Honeywell International (HON:  NYSE) is making Blink EV charging available at Honeywell offices in Phoenix, Arizona.

Another public company Envision Solar International, Inc. (EVSI:  OTC/PK) is gaining visibility.  While not aiming for the same nationwide web of charging stations across the country, the company offers a unique and valuable technology to owners of electric vehicles.  Their EV ARC charging unit is solar powered, using a battery pack to enable charging services available around the clock.  Envision has been taking orders since the beginning of 2011, focusing much of its marketing effort on the sunbelt states of Arizona and California.  Nearly 80% of all electric cars in the U.S. are located in California where strict emission standards and rebates, drive electric vehicle economics.  The company recently won a contract with the state of California to supply its proprietary portable electric vehicle charging units for use by state government agencies and employees.  The portable units make possible EV charging in remote locations that are not grid connected.

Traders reading about these three companies might be grumbling a bit at the lack of investment opportunity.  ChargePoint is a private company and off-limits to most investors.  The stocks of Car Charging Group and Envision Solar both are publicly registered and available for minority investors.  Unfortunately, both stocks trade for pennies per share.  Nonetheless, I believe these companies are worth watching carefully as electric vehicles become a larger component of personal transportation.

First, I expect considerable consolidation in the EV charging industry.  There are numerous companies in the U.S., including SemaConnect amd PlugShare.  In Europe there is Full Charger International, Park & Charge and Elektromotive Group as well as Ecotricity in the U.K.  Mergers and acquisitions are likely to be an economical means to capture technology and market share.  Although Car Charging lost out with its bid on the assets of bankrupt Better Place, it had already proven its capacity to strike a bargain with the Ecototality and Blink deals.

Second, ChargePoint has been well received in the venture and private capital market.  At some time its investors will seek to reap returns, making a public offering more likely than not.  It is worthwhile following ChargePoint in case this is the path it is traveling.

Third, the pricing of Car Charging and Envision as penny stocks, are less intimidating if the stocks are regarded as options.  These two companies are not direct competitors at this point and offer interesting footholds in the market for car charging stations.  For a few pennies traders will have security linked to car charging technology and capacity that could fizzle…or flourish.  Management will be working toward the latter outcome, making the stock an option on management execution.

The next post focuses on a large, public company that has taken significant interest in electric car charging.

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.

July 16, 2015

Hanery Shares To Remain Suspended During Manipulation Probe

Doug Young 

Bottom line: Hanergy shares will remain forcibly suspended until the Hong Kong securities regulator completes its investigation into price manipulation, and could ultimately return to China where oversight is far less strict.

I had to smile when I read the latest reports that said the Hong Kong securities regulator has taken the unusual step of ordering a continued suspension of shares of solar power equipment maker Hanergy (HKEx: 566), as it continues a probe into stock price manipulation. My smile wasn’t due to the continued suspension, but rather to the reason that media reports gave for the investigation, namely the spectacular rise in the company’s price over a one-year period, followed by its even faster plunge. (previous post)

That story was actually quite well documented back in May, when Hanergy’s shares lost nearly half of their value in a single hour after rising 6-fold over the previous year, wiping out $19 billion in market value. China stock watchers will know that the reason for my smile is that this kind of meteoric rise and fall is quite ordinary just across the border in China, and seldom attracts similar scrutiny from the China Securities Regulatory Commission.

But of course when it comes to financial markets, China and Hong Kong are in 2 completely separate leagues. Whereas Hong Kong’s stock markets are relatively mature and get regular praise for their good oversight, China’s markets are more like a casino where shares can double or even triple in just a few weeks without any change in a company’s prospects. Such speculative buying is largely behind the huge rises in the Shanghai and Shenzhen stock exchanges over the last year, and now the equally big falls.

All that said, kudos should go to the Hong Kong Securities and Futures Commission for ordering a continued halt in Hanergy shares. (company announcement; Chinese article) Hanergy stock was suspended on May 20 at the company’s request, after it lost nearly half their value in the first hour of trading that day. This new order means that trading can’t resume until the regulator gives the green light, even if Hanergy itself wants its shares to start trading again.

The securities regulator opened an investigation into Hanergy for potential stock manipulation, and company watchers are guessing the suspension will remain until that investigation is concluded. In this case the regulator should get just a bit of criticism, since it probably should have opened its investigation earlier, perhaps when Hanergy shares had risen by 3-fold or 4-fold, instead of waiting for the price collapse.

Turbo-charged Speculation

But returning to my original point, this kind of turbo-charged speculative buying and behind-the-scenes share price manipulation is rampant in China, and has been a major factor behind the stock market’s recent volatility. Online video company LeTV (Shenzhen: 300104) is one of the few China-traded companies I follow, and is a good example of this speculative and manipulative buying.

The company’s shares were relatively stable heading into last summer, when they suddenly embarked on a rally that saw them rise more than 5-fold to an all-time high this May. Since then, however, they’ve lost about a third of their value in the broader market sell-off. An even higher-profile case is Baofeng (Shenzhen: 300431), another online video company, whose shares soared by a staggering factor of 43 after their IPO in March, before tumbling 27 percent from their high in June amid the recent sell-off. (previous post)

Hanergy must certainly be looking enviously at companies like Baofeng, which are allowed to continue trading despite the blatant share manipulation that is happening to boost their stocks so much. Of course I’m being slightly sarcastic, since such volatility really isn’t good for any stock over the longer term and probably would cause nightmares for company executives in any mature market. But Chinese entrepreneurs who simply like to see their stocks rise might not care as much about such volatility, which perhaps is one of several factors leading many US-listed Chinese companies to mount privatization drives with an aim of re-listing back at home.

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.

July 15, 2015

Moving Microgrids Beyond R&D

by Joe McCabe

Where is the money in microgrids? My goal at this years Intersolar event was to try and answer this question; to figure out the value proposition of microgrids as they relate to distributed generation, storage, renewable energy and photovoltaics. 

A microgrid is an electrical supply and use system that can operate autonomously. Although all microgrids are small relative to the electric grid as a whole, the huge size of the grid leaves a broad range of what can count as “micro.”  Microgrids can be as small as a single building, but range on up through schools and military bases and an entire community, such as San Diego Gas and  Electric's Borrego Springs CA microgrid which includes Spirae equipment.  Even my plug-in-prius with an an AC inverter can be considered a microgrid.

Islands have microgrids already, with Hawaii leading the experience curve on what an electrical grid looks like with increasing levels of intermittent renewable energy power sources. On the US mainland, research and development projects have funded microgrids using words like resilience and reliability as justification for the work. But it is hard to find the monetization of these concepts which is needed to justify any return on an investment for microgrid functionality.

At this past week's Intersolar NA 2015 held in San Francisco, microgrid companies were exhibited more frequently than in past years (see my previous articles from Intersolar NA events on racking, storage and what not). Jerry Brown's most recent inaugural address included the word "microgrid".  Microgrids provide an added value for uninterruptible power. Unreliable grids are typically found in developing nations, so the US with today's relatively reliable grid doesn't typically have a realistic value proposition. The term resilience is being used more often as it relates to the grid with increasing levels of intermittent renewable energy. The cyber security of the grid is and will continue to be increasingly scrutinized. Hurricane Sandy prompted New Jersey to develop the Energy Resilience Bank with funding for systems sized to provide energy to critical loads during a seven-day grid outage.

Use-cases driving the discussions around microgrids are used by the California Smart Inverter Working Group to develop rules around the advanced functionality of inverters with and without electrical storage. A growing group of electrical utility and solar industry professional meet weekly to discuss the new California Rule 21 language, the communications/security/rules/scheduling of valuable advanced functionality.  All inverters sold into California will be required to have this advanced functionality starting at the end of 2016.

Greensmith is a company that exhibited again at this years Intersolar discussing their ability to work with all manufacturers of storage and inverter equipment.

Other companies whose products and services that relate to microgrids at Intersolar included Princeton Power Systems (developers of the Alcatraz Island microgrid),

Dynapower developers of the Green Mountain Rutland City, VT microgrid which includes a PV system on a brownfield landfill privately owned by Frankston Holdings.

Ideal Power has an interesting 125 kW inverter that will take PV, charge and discharge storage and integrate with a generator to provide AC power on a microgrid.

Solar Energy International held a workshop which included microgrid content. In future years you will probably see a focus on microgrids at Intersolar as you saw with the evolution of storage that this year dominated one floor of the Moscone Center's West hall exhibit space.

Duke, American Electric Power, Berkshire Hathaway Energy, Edison International, Eversource Energy, Exelon, Great Plains Energy and Southern Co. have grouped together on microgrid issues under the umbrella of Grid Assurance.

One of the biggest announcements for this space was the July 1st submission of Southern California Edison's Energy's Distributed Energy Plan to the California Public Utilities Commission. Edison indicated they will be opening up their ~20,000 distribution lines to third party vendors of electrical services because Edison's business is being a wires company. In my view, this opens up the opportunity to genuinely value microgrids at each of the connection points for residential, commercial and industrial customers on the distribution lines. I wasn't able to answer the question of the value for microgrids within large scale grids in $'s/resilience or $'s/reliability. Perhaps in the not too distant future each utility customer will be charged accurately for the safety, security, resilience, and reliability of its electricity with the help of Edison's new awareness around their Distributed Energy Plan.

Conclusion

Microgrids will become increasingly important to the storage, solar and wind power industries because they will add security, resilience and reliability values.  Off grid and island systems continue to be successfully implemented.

Rule 21 equipment being required at the end of 2016 and PJM's frequency markets are enablers for the monetization of microgrids values, possibly by as early as 2017. When you see these values monetized as is currently done with energy ($/kWh), power ($/kW), frequency regulation (PJM) and power factor correction ($/kVAR) are monetized, then microgrids will become widespread.


Joseph McCabe is an international solar industry expert with over 20 years in the business. He is a Solar Energy Society Fellow, a Professional Engineer, and is a recognized expert in developing new business models for the industry including Community Solar Gardens and Utility Owned Inverters. McCabe has a Masters Degree in Nuclear and Energy Engineering and a Masters Degree of Business Administration.

Joe is a Contributing Editor to Alt Energy Stocks and can be reached at energy [no space] ideas at gmail dotcom.  Please contact Joe for permission to reprint.

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Thanks to Ravi Manghani of GTM Research, Steven Strong of Solar Design Associates and Solar Energy International  for help with content on this article.

July 14, 2015

PowerSecure on a Solar Roll

by Debra Fiakas CFA

Last week PowerSecure International (POWR:  Nasdaq) announced the award of orders valued at $100 million for new solar projects.  About 15% of the work will be completed in the final quarter of this year and the rest of the revenue will be recorded in 2016.  The announcement sent investors into a tizzy.  PowerSecure reported $283.4 million in total sales for the twelve months ending March 2015, primarily for solar power infrastructure and smart grid technology destined for electric utilities and microgrids. 

Securing orders equivalent to 35% of its current revenue run rate is quite impressive, in my view, signaling that PowerSecure is capturing market share with U.S. electric utilities.  As the solar power industry matures, transforming from early stage to established, becoming the ‘go-to’ source for successful solar project deployment is important.  PowerSecure offers smart grid and demand response technologies that help set it’s solar power generation systems apart from the rest of the pack.

This was not the first time that PowerSecure had made an announcement of material orders.  A year ago the company won a major contract award valued at $120 million for an electric utility.  Since then new contracts have trickled in, but total have only come to about $30 million.  If investors have been concerned that the large order in 2014, was to make PowerSecure a ‘one shot wonder,’ their worries are over.  The most recent order helps cast PowerSecure as an established player in the solar project development market.

To add to the drama, the company’s announcement was made during the final trading day last week.  Trading the stock was halted pending receipt of the news.  On hearing the good news, investors immediately bid the stock higher and trading volume ramped to three times the recent average.

Analysts with published estimates for PowerSecure may have already anticipated the revenue.  The consensus estimate for the year 2015, indicates analysts have a bullish view on the year with a total sales estimate of $386.7 million.  This represents 36% growth over the recent revenue run rate up in the twelve months ending March 2015.  Likewise, the consensus sales estimate for the year 2016, represents 17% growth over the estimate for 2015.  Consequently, investors might not see the usual string of upward estimate revisions that often send investors off to place buy orders for stocks.

Nonetheless, the news is certainly bullish for PowerSecure.  The company posted a net loss in 2014.  The new order appears to be large enough to put the company back ‘into the black.’  That should be bullish for the stock price.    

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. 

July 13, 2015

Recent Green Bonds: Toyota Hybrids, SunRun, Efficient Homes and Data Centers

by the Climate Bonds Team

Last month Toyota closed their second green bond for a whopping $1.25bn. Standard auto loans backed the issuance with proceeds to be used for electric and hybrid car loans; that means it’s more like a corporate green bond, where proceeds from a bond backed by existing (non-green) assets are directed green loans still to be made.

Sunrun issued $111m of solar ABS, and a small unlabelled energy efficiency ABS was also issued by Renew Financial and Citi for $12.58m. Sunrun and Citi/Renew Financial are examples of ABS where the assets backing the issuance are green. This type of green ABS introduces new low-carbon assets to the securitisation market, such as solar leases and energy efficiency loans.

Toyota issues second green ABS US$1.25bn, 1-5yrs, AA+/Aa3

The finance arm of Toyota issued their 2nd green ABS with an impressive US$1.25bn deal, after being the first to issue a labelled green ABS in 2014. There are 7 tranches with a range of tenors (1-5yrs) and coupons (0.3%-1.74%). Citi, Credit Agricole and Bank of America Merrill Lynch were the lead underwriters.

In line with Toyota’s last green ABS issuance, proceeds from the bond will go to fund a pool of leases and loans for low-carbon Toyota vehicles. To give you an idea of the size of the pool – Toyota’s first green ABS bond financed the purchase of 39,900 vehicles! Toyota sets clear criteria for eight different models of cars that can be funded:

  • Gas-electric hybrid or alternative fuel powertrain
  • Minimum EPA estimated MPG (or MPG equivalent for alternative fuel vehicles) of 35 city / 35 highway
  • California Low-Emission Vehicle II (LEV II) certification of super ultra-low emission vehicles (SULEVs) or higher, which would include partial zero emissions vehicles (PZEVs) and zero emissions vehicles (ZEVs)

Citi and Renew Financial issues US$12.58m ABS backed by energy efficiency loans (6yrs, 3.51%, A), as part of WHEEL, a Pennsylvania Treasury initiative

Citi and Renew Financial issued US$12.58m of climate-aligned asset-backed securities. Although not labelled as green, we include this deal in our universe of unlabelled climate-aligned bonds.

The deal is the first ABS issuance arising from the US-based Warehouse for Energy Efficiency Loans (WHEEL). WHEEL is a public-private partnership established in 2014 with the State of Pennsylvania Treasury. The set-up is that approved local contractors offer low-cost loans to customers to finance energy efficiency projects, which are then bought into a financial warehouse by the company Renew Financial. To do this, Renew Financial uses a credit facility capitalised by a mix of public money, from the Pennsylvania Treasury, and private money, from the commercial bank Citi. This process continues until the aggregated amount of loans in the warehouse meet the size requirements of the capital markets, and the loans are bundles together and sold to institutional investors as securities backed by energy efficiency loans.

Brilliant to see private sector actors collaborating with state and local governments to get the deal off the ground. This is exactly the kind of collaborative setups we need to have to rapidly grow a green securitisation market, in the US and globally. Bravo all involved!

Sunrun issues $111m ABS backed by solar leases in two tranches (100m, 30 yr, 4.4%, A; 11m, 30 yr, 5.38%, BBB)

Sunrun Inc., a US provider of residential solar, issued $111m of "Solar Asset-backed Notes" in two tranches. $100m with a coupon of 4.4% rated A by KBRA, and $11m with a coupon of 5.38% rated BBB. Tenor for both tranches is 30 years. Credit Suisse was the lead underwriter for the deal.

The notes are backed solely by the cash flow generated by a portfolio of residential solar energy systems and related customer agreements. This transaction represents Sunrun's inaugural issuance into the asset backed securitisation market. SolarCity pioneered issuance of ABS in the solar space in 2013 and 2014.

We’re looking forward to seeing more exciting green ABS issuances this year – this flurry of deals demonstrates the potential for green ABS to grow investment in a wide variety of small-scale low-carbon assets.

Digital Realty Trust issues US$500m green bond (3.95%, 7yr) for low-carbon buildings

Real Estate Investment Trust (REIT) Digital Realty Trust Inc. has issued its first green bond for US$500m to finance green buildings for data centres. The bond has 3.95% coupon and 7 year tenor. Bank of America Merrill Lynch, Citigroup, J.P. Morgan, RBC Capital Markets, and US Bankcorp are the deal underwriters.

The proceeds of the green bond will go to fund eligible green building projects. Instead of a second review from an independent party, Digital Realty has referenced existing green building standards, setting specific performance criteria that building projects must hit to be eligible. For example, buildings must have received, or be expected to obtain, LEED certification Silver, Gold or Platinum; BREEAM certification level Very Good, Excellent or Outstanding; BCA Green Mark rating Gold, GoldPlus or Platinum; Green Globes 3 or 4; CEEDA Silver or Gold or CASBEE B+, A or S.

Projects funded can be new or on-going building developments, renovations in existing buildings and tenant improvements. Any upgrade projects must improve energy or water efficiency by a minimum of 15% and be checked by an external party. Excellent that they have nominated a hurdle rate – something we should expect all green property bond issuers to do.

Digital Realty will report annually on their website covering the allocation of proceeds to eligible projects and status of green building certifications of the projects. An independent accountant will verify the company’s statement.

Next time we hope to see even more ambition with hurdle rates, and we'll be keen to see more detail about the (excellent) commitment to onsite renewables used. Also, some building standards cited are not as good as they could be — for example Singapore’s Green Mark Gold only represents the legislated minimum for a new development, with most new developments achieving well above the lowest nominated. We’re working on that to make it easier for issuers! But the great improvements around green property commitments in US market demonstrated by this bond outweigh such concerns for us.

Digital Realty have done a great job with their debut bond.

Latvenergo’s EUR75m green bond issued last week (1.9%, 7 yr, Baa2) will use proceeds for bioenergy, environmental preservation and sustainable environment

The first Latvian green bond from power utility Latvenergo was upsized from EUR 50m to EUR75m (US$84.8m), with a fixed annual coupon of 1.9%, 7-year tenor and rated Baa2 by Moody’s. The sole underwriter was SEB.

CICERO’s second opinion rated Latvenergo’s bond as “dark green”. Proceeds will be used for energy efficiency projects in the electric power grid and other projects (renewable energy, environment preservation, biodiversity and R&D for sustainable environment).

The renewable energy projects focus on bioenergy power plants. Experts tell us that using sustainable feedstock is crucial in bioenergy (see the Climate Bonds Standard for more details). Latvenergo is using only local Latvian wood, which is good to hear, although it would be good if investors were given certainty on whether the feedstock for Latvenergo’s bioenergy plants will be certified – from what we can tell only 50% of Latvia’s forests are certified under the Forest Stewardship Council.

Projects in the environmental preservation and sustainable environment category seek to minimise the environmental impacts of existing operations, such as hydropower and the electric grid infrastructure. Safety and flood management improvements for hydropower, protecting fish migration around dams and monitoring electric power poles for white storks nests (a protected species) are all eligible projects.

R&D also falls into the sustainable environment bucket. Proceeds from green bonds are generally used for green assets rather than R&D into future projects; we are interested to see how the green outcomes will be reported next year. It’s worth noting that only up to 10% can go toward this project type.

Overall: great to see Latvia’s first green bond in the market!

European rail finance powerhouse Eurofima issue unlabelled climate-aligned kanga bond for A$35m ($27m)

We’ve covered “unlabelled” solar and wind bonds in the past; we will now start including other unlabelled bonds that are climate-related. This week’s example is the large rail finance entity Eurofima (a supranational: a financing agency backed by mutliple governments) issuing an A$35m 10-year bond with 3.9% coupon. It has a AA+ and Aa1 rating from S&P and Moodys respectively.

Rail infrastructure is a key part of low-carbon transport, since rail is far superior on emissions performance compared to road-based travel. According to our 2015 State of the Market report there are $418.bn of low-carbon transport bonds outstanding, mainly in the unlabelled climate-aligned bond universe. So plenty of opportunities around for investors.

——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong, Beate Sonerud, and Justine Leigh-Bell. 
 The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

July 12, 2015

CAFD: Don't Let The Joke Be On You

Tom Konrad CFA

Sunpower and First Solar are indulging in nerd jokes. 

Their YieldCo, called 8point3 Energy Partners had its initial public offering on June 19th. The name is an astronomy nerd joke and a reference to the time it takes the sun's rays to reach the Earth, 8.3 minutes. Last week, we found out that its ticker symbol is CAFD, a "financial nerd joke" because it stands for "cash available for distribution." 

CAFD is an important YieldCo metric, but it's not a perfect one. If you're not a financial nerd but are interested in investing in YieldCos, here's what you need to know to make sure the joke isn't on you.

What is CAFD?

Cash available for distribution (CAFD) is a YieldCo's estimate of how much of the cash from its assets is available after it has paid the cash expenses necessary to keep the company running. Such expenses mostly consist of interest and principal payments on debt and maintenance of facilities. Cash spent on new investments is also deducted, but this deduction is typically net of equity or debt financing.

CAFD is a "non-GAAP" measure, meaning it is defined by generally accepted accounting principles (GAAP), and so is not always comparable between YieldCos, as their definitions may vary slightly from the one above. Some YieldCos also use other names, such as "adjusted earnings per share" by NextEra Energy Partners (NEP) or "core earnings" used by Hannon Armstrong (HASI).

YieldCos are designed to return as much cash as they can to investors without compromising the company's sustainability. Since there is no GAAP measure of how much cash a company can return to investors, they had to invent one. This is also a common practice among other income-oriented classes of securities such as REITs ("adjusted funds from operations").

Strengths and weaknesses

Like any metric, CAFD has strengths and weaknesses. Its greatest strength is observability. Unlike GAAP measures like earnings, there is no need to estimate the likely life of an asset for purposes of depreciation, and no need to accrue expected future costs. Such estimates are intended to help earnings and other GAAP measures to reflect the true economic results of a company, but the very complexity of the rules often obscures as much as it reveals.

CAFD's greatest weakness is that it is short-term in nature. While most YieldCo businesses are fairly stable, nothing is forever. Most YieldCo assets are long-lived, but even solar panels degrade slowly over time, and most wind turbines are designed to last around 20 years. Further, many YieldCo assets had been operating for some time before they were acquired.

Perhaps more important are the power-purchase agreements (PPAs) under which YieldCos sell the power they generate. These agreements typically have another 15 to 20 years to run, but many YieldCos seem to assume that they will be renewed on similar or even more advantageous terms when they expire.

Rules of thumb

Investors who want to choose between YieldCos should pay attention to CAFD per share and YieldCo CAFD per share growth targets, because dividends closely follow CAFD per share. But CAFD should not be the sole focus. They also need to understand how CAFD's short-term nature will bias the comparisons between YieldCos.

Beyond higher current and future CAFD, investors should prefer

  • YieldCos with longer-term PPAs
  • Longer-lived assets (hydropower lasts longer than solar, which lasts longer than wind)
  • Better-credit-quality power purchasers
  • PPAs that sell power for close to the market price (because these are more likely to be renewed on favorable terms)
  • Technologies which are not getting cheaper rapidly, or unique assets
  • Dispatchable generation technologies
  • Technologies that require fewer inputs (fossil fuels, water, biomass) that might cost more in the future
  • Technologies that produce less pollution and are subject to potential regulation

PPA pricing risk

The problem for YieldCos that own assets which are getting rapidly cheaper lies in the prospects of PPA renewal. For example, solar photovoltaic system prices are universally expected to continue to decline (see chart below).

Today, a new utility-scale solar facility costs about $2,000 to $2,500 per kilowatt. It will produce about 1.2 megawatt-hours to 2 megawatt-hours per year per kilowatt, depending mostly on the local climate. Suppose we have a new solar facility that produces 1.5 megawatt-hours per year per kilowatt and which cost $2,250 per kilowatt to build. If various incentives cover half the cost, the facility would require a PPA at $67 per megawatt-hour to achieve a 9 percent CAFD yield.

Now consider what will happen in 15 years when the PPA expires. The facility will have degraded somewhat, reducing its output by 5 percent, maybe a little more. A new solar facility next door will be much cheaper, but will likely also qualify for far fewer incentives. If we assume that the new facility will cost $1,000 per kilowatt after (much-reduced) incentives, it would need a PPA at $59 per megawatt-hour to achieve the same to 9 percent CAFD yield. $1,000 per kW is a very conservative estimate for installed commercial solar costs in 2030 given that First Solar's (FSLR) CEO expects that his company can hit that target by 2017.

If the customer can sign a PPA with a new solar farm at $59 per megawatt-hour, why would they sign a PPA with the old farm for more? After the 5 percent degradation and slightly higher maintenance costs for the older solar facility, a $59 per megawatt-hour PPA will only result in a 7.5 percent CAFD yield from a renewed PPA.

Hence, PPA prices for electricity from technologies like solar with rapidly declining costs are likely to fall as well. Since this effect may be partially offset by falling subsidies, YieldCos which own subsidized facilities may have an advantage if those subsidies are removed for future, competing facilities.

The weather-dependent nature of solar and wind is likely to exacerbate this problem. It used to be that solar production was well aligned with peak load on sunny summer afternoons. Now, locations with high solar penetration are beginning to experience a “duck curve,” with power prices dropping when solar production is at its peak.

In 15 years, when solar and wind PPAs will need to be renewed, it seems unlikely that utilities will be queuing up to purchase power that arrives when they need it least. Parts of the grid with high wind penetration already see zero or negative electricity prices at times of high wind and low electric demand, although grid expansion can alleviate this problem.

Such weather-related effects favor dispatchable technologies like natural-gas generation, but this advantage is offset by regulatory risk, because gas is a fossil fuel. 

Technologies like hydroelectric and geothermal are likely to have the most durable pricing power. Not only do hydroelectric power plants usually last for 50 years, they typically have longer-term PPAs. They also have very little competition from new hydroelectric or geothermal plants nearby, because the best sites are already taken. Both hydro and geothermal have some potential for dispatchability, also reducing their long-term pricing risks, although resource risks from geothermal reservoir depletion and changing weather patterns should not be ignored for either.

Incentive distribution rights and dividend

Normally, a YieldCo's dividend is directly linked to its CAFD because it will distribute all its cash available for distribution. Incentive distribution rights (IDRs) change this, because they allow for a larger share of CAFD to flow back to the YieldCo sponsor. YieldCos with IDRs include NextEra Energy Partners, TerraForm Power, Brookfield Renewable Energy Partners, and now 8point3. 

CAFD is a great metric in that it gives investors a quick guide to what sort of dividend to expect in the short term. Given its short-term nature, this may be all that short-term investors and traders need. Income investors typically have a longer-term outlook. For them, it makes sense to look at the many factors detailed above which will affect a YieldCo's dividend over the long term. 

All clean energy technologies have risk, and we do not know which will be most important over the long term. Hence, it makes sense to diversify some of this risk away by including YieldCos which own less common clean energy technologies, such as geothermal, hydropower and energy efficiency.

There is not yet any publicly traded YieldCo which owns any geothermal assets, but both U.S. Geothermal and Alterra Power own geothermal assets, and could benefit if YieldCos seek to buy such assets to diversify their portfolios. Unfortunately for income investors, neither pays a dividend.

Both Brookfield Renewable Energy and Canadian power producer Innergex Renewable Energy own mostly hydroelectric facilities and pay healthy dividends. Alterra Power also owns hydroelectric facilities.

The unique sustainable infrastructure financier Hannon Armstrong has the most diverse portfolio, and is currently the only YieldCo with significant energy-efficiency investments.

 ***

Tom Konrad is a financial analyst, freelance writer, and portfolio manager specializing in renewable energy and energy efficiency. He's also an editor at AltEnergyStocks.com.

Disclosure: Long Hannon Armstrong, Brookfield Renewable Energy Partners, Alterra Power, Innergex Renewable Energy, First Solar.

Note: The author of this article will be an instructor at EUCI's "The Rise of The YieldCo" workshop on July 30-31. This article was first published on GreenTech Media and is reprinted with permission.

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. 

July 11, 2015

2017 Electric Car Investment Guide

By Jeff Siegel

The car world is obsessed with Tesla (NASDAQ: TSLA)...

And for good reason.

After all, in the world of vehicle design and alternative fuels, no one has taken this disruptive technology further than Elon Musk and Tesla Motors.

The days of glorified golf carts are long gone. And although few can actually afford an $80,000 Model S, Tesla isn’t the only game in town.

In fact, Nissan (OTCBB: NSANY), which makes the all-electric LEAF, recently announced that after four years, its alliance with Renault has officially sold 250,000 electric cars.

That may not sound like much, especially when you compare that to the Ford Fusion, which sold about the same number of cars in a single year in 2014. But in the scheme of things, this is a very big deal.

After all, five years ago, only 17,000 electric cars were sold in the U.S. Nissan’s cut came in at 9,674 units.

Today, the Nissan-Renault alliance has sold a quarter of a million electric cars worldwide.

To put that in perspective, the very first hybrid vehicle to hit the market was the Honda Insight. To date, it hasn’t even broken 100,000 units.

Of course, the real superstar in the world of conventional hybrids is the Toyota Prius.

Folks, it took six years for Toyota to sell 228,000 units of the Prius.

If you combine Honda Insight sales and Toyota Prius sales, it took both manufacturers six years to sell what the Nissan-Renault has sold in electric cars in just four years.

So when we speak about growth, this is what we’re talking about.

In the passenger vehicle space, you will find no greater growth story than the electric car. And that, dear reader, is why smart investors have a keen interest in the electric car trend.

The Front-Runners

In the world of conventional hybrids, it didn’t take long for Toyota to lead the pack with the Prius.

Bottom line: The Prius has always delivered better fuel economy and a better all-around ride than its competitors. Priced competitively, it’s no wonder Toyota continues to run this show

But when it comes to electric cars, the jury’s still out as to which manufacturer will become the mainstay of electrics.

The most common electric cars on the road today are the Tesla Model S, the Chevy Volt, and the Nissan LEAF. But between small production levels of compliance cars and new entries designed to compete with the front-runners, there are now more than a dozen electric vehicles from which to choose.

Which will reign supreme is still anyone’s guess.

However, we do know that a number of these manufacturers are upping the ante in major way for future releases. And the two main sticking points for consumers are range and price.

So let’s take a look at the specs of what’ll soon be hitting the showrooms...

Tesla Model 3

  • All-electric range: 250 miles
  • Retail cost: $35,000 without federal tax incentive/$27,500 with federal tax incentive
  • Launch date: 2017

Chevy Bolt

  • All-electric range: 200 miles
  • Retail cost: $37,500 without federal tax incentive/$30,000 with federal tax incentive
  • Launch date: 2017

Nissan LEAF

  • All-electric range: 250 miles (estimated)
  • Retail cost: $30,000 (est.) without federal tax incentive/$22,500 (est.) with federal tax incentive
  • Launch date: 2017

Both BMW and Audi have new electric offerings coming too, yet specs on these models are still somewhat under wraps.

I’m not sure how many more Fiat 500es will be made either, but Fiat CEO Sergio Marchionne has criticized the vehicle from day one, actually telling customers not to buy it. Apparently it continues to have software problems, too.

This will really never be more than a compliance car, and quite frankly, it’s not even worth considering in terms of the big technological disruptions in the coming years. As far as I know, there are no future plans to offer a better version.

Also not coming soon are newer versions of the Chevy Spark EV — which is actually a cool little car that comes with a pretty decent price tag. Sure, it’ll only give you about 70 miles on a charge, but for a city car or a car that’ll take you to and from work every day, it’s not a bad deal.

Charge times are as little as 20 minutes (for an 80% charge), and with the federal tax credit, you can get one for about $18,500. And if you live in a state that offers its own incentives, you could pay even less.

In Maryland, with both state and federal tax incentives, I could pick one up for about $16,000. Not bad for a car that’ll never need a drop of gasoline, a single oil change, or a pricey emissions test.

Admittedly, it’s not quite as comfortable or as stylish as a Tesla Model S — but for the price, you can’t beat it.

In any event, from an investor’s point of view, the three manufacturers to watch are Tesla, Nissan, and GM (NYSE: GM).

Obviously Tesla is the pure play here. Whether or not you want to take a position in Tesla is really based on how much faith you have in Elon Musk and his ability sell the company’s next-generation Model 3. And don’t forget the energy storage business Musk is running as well.

Certainly I wouldn’t invest in GM or Nissan to get a piece of the electric vehicle market. But continue to watch for new developments in battery chemistries, software designs, and next-generation, lightweight materials that could offer a backdoor way to play the booming electric vehicle market.

Because rest assured, the age of electric transportation is here to stay. And getting a piece of this action today is like getting a piece of Ford (NYSE: F) right before the first Model T rolled off the line.

We’re definitely off to the races, my friend. And electric cars are in the pole position.

To a new way of life and a new generation of wealth...

 signature

Jeff Siegel is Editor of Energy and Capital, where this article was first published.  follow basic@JeffSiegel on Twitter

July 10, 2015

How Much Can YieldCo Dividends Grow?

Tom Konrad CFA

U.S.-listed YieldCos seem to offer the best of two worlds: high income from dividends, combined with high dividend per share growth.

YieldCos are listed companies that own clean energy assets, and like the real estate investment trusts (REITs) and master limited partnerships (MLPs) they are modeled after, they return almost all the income from their investments to their shareholders in the form of dividends. Unlike REITs and MLPs, however, U.S.-listed YieldCos have management targets to deliver double-digit per-share dividend growth.

Historic and target growth

YieldCos shown are NRG Yield (NYLD), Abengoa Yield (ABY), TerraForm Power (TERP), NextEra Energy Partners (NEP), Hannon Armstrong (HASI), Pattern Energy Group (PEGI), Brookfield Renewable Energy (BEP), and TransAlta Renewables (TSX:RNW, OTC:TRSWF).

Historic growth rates are not shown for some YieldCos because they have only been paying dividends for less than a full year. Dividend growth targets are not shown for TransAlta Renewables because the company's management has not issued explicit targets. The data shown is drawn from company financial filings.

In contrast, growth rates above 10 percent for REITs and MLPs are virtually unheard of, but they are the norm for U.S.-listed YieldCos. 

Sources of dividend growth

Companies can achieve per-share dividend growth in a number of ways: normal increases in income from existing business; reinvesting money generated by the business; and investing money from new share issuance.

In the case of YieldCos, income from existing clean energy facilities can increase because of inflation escalators built into the power-purchase agreements (PPAs), or if the YieldCo invests to increase power production. PPA escalators tend to be low (2 percent or less.)  

Aside from the natural increase in cash flow from escalators in existing PPAs, a YieldCo can raise its cash flow available for distribution (CAFD) per share by increasing invested capital per share. Companies often increase invested capital per share by investing some available cash flow. This increases future dividends at the expense of current yield. Since most YieldCos distribute nearly all of their available cash flow, this is not a significant contributor to dividend growth.

Instead, YieldCos typically issue new shares to pay for new investments. Because most YieldCos have seen significant price appreciation since their IPOs, new shares can be sold for higher prices than previous shares.  Share issues always provide more capital for a company to invest. When those shares are sold at higher prices, they also increase the per-share capital.

The following chart shows how the three oldest U.S. YieldCos have been able to increase the issue price of secondary offerings over time.

Yieldco Share Issuance

By selling new shares to the public, many YieldCos have been able to achieve the high per-share dividend growth rates shown in the first chart.

High dividend growth

In theory, as long as their share prices keep rising, YieldCos will be able to maintain their historic high dividend growth rates forever. 

In fact, recent price rises mean that dividend growth can continue for some time even without further share appreciation. The chart below shows the expected per-share dividend increase which would arise from investing the proceeds of a share issue at the current stock price, along with the YieldCos' stated growth targets. 

In the chart, a “percentage share increase” means issuing a number of shares, which is the percentage of the shares currently outstanding. For instance, if a YieldCo has 10 million shares outstanding, issuing 2 million shares would be a 20 percent increase, 5 million new shares would be a 50 percent increase, and 10 million new shares would be a 100 percent increase.

The effects of larger-percentage stock issues are not shown in the chart if the YieldCo is already so large that the new issue would exceed $2 billion. This is because investors would not be willing to buy so much new stock quickly, and the YieldCo would have trouble finding so many attractive projects to invest in quickly.

The $2 billion number is arbitrary, but I chose it because the largest YieldCo acquisition to date was TransAlta Renewables purchase of $1.78 billion worth of assets in Western Australia from its parent company TransAlta. Most YieldCo acquisitions are much smaller, and no YieldCo has bought more than $2 billion worth of assets during its history as a public company.

Yieldco distribution growth

As you can see in the chart above, the U.S.-listed YieldCos NRG Yield, Abengoa Yield, TerraForm Power, and NextEra Energy Partners have the greatest potential for percentage increases in their per-share dividends. 

The U.S.-listed REIT Hannon Armstrong, which is very similar to the YieldCo despite its REIT structure, and the dual-listed YieldCos Pattern Energy Group and Brookfield Renewable Energy Partners also have good potential and target percentage growth rates. From the perspective of growth potential, the Canadian-listed YieldCo TransAlta Renewables is far behind. It also lacks specific per-share growth targets.

Not high yield

These impressive per-share growth rates disguise the vulnerability of relying on new share issuance for new investment. The share price increases necessary to perpetuate rapidly growing distributions also reduce the yield.  This is because yield is simply distributions per share divided by the share price.

Unless the share price falls, the amount of invested capital from share issuance will never exceed the share price, and so the dividend yield will remain below the YieldCo's cash-on-cash returns from new investments. 

As we have seen here and in the chart below, YieldCos' new investments have cash-on-cash returns in the 7 percent to 9 percent range.

Despite the potential for rapid percentage dividend growth, the 7 percent to 9 percent range for YieldCo returns on investment will also cap future yields. No YieldCo can have a higher distribution yield unless its price falls, or it starts to reinvest some of its cash flow into the business, which would cause its yield to fall in the short term.

This final chart is similar to the Model Growth In YieldCo distributions chart above, except that here the dividends are shown as a yield on the current share price.

From the perspective of current and potential future yield at the current share price, the U.S.-listed YieldCos suddenly seem much less impressive. In fact, the previous apparent laggard, TransAlta Renewables, already has a current yield as high as the yield which the best other YieldCos hope to achieve after two more years. 

Even if their impressive dividend growth rates continue, the U.S.-listed YieldCos are many years from achieving yields comparable to TransAlta Renewables' yield today.

More bad news

The illusion of rapid dividend growth is not the only bad news. TerraForm Power, NextEra Energy Partners, and Brookfield Renewable have incentive distribution rights (IDRs) which give the YieldCo's parent company (General Partner) a growing percentage of distributions when those distributions exceed certain levels per share. TerraForm's IDR will begin to take effect when the quarterly dividend hits 34 cents per share (it's currently 32 cents), and it will rise to 50 percent of distribution increases when it hits 45 cents.

NextEra Energy Partners' IDR Fee will begin to take effect when quarterly dividends reach 21.6 cents (currently 19.5 cents).  It will rise to half of distribution increases when dividends reach 28.1 cents.

Brookfield's incentive distributions are currently in effect, with the parent Brookfield Asset Management currently receiving 15 percent of quarterly distributions in excess of 37.5 cents. This incentive will soon rise to 25 percent when quarterly dividends exceed 42.25 cents per share. Dividends are currently 41 cents, so the 25 percent threshold will likely be met soon.

YieldCos' parent companies justify IDRs because they supposedly align the parents' interests with the YieldCos' shareholders. Since the parents have complete control, and are often the sellers of the clean energy facilities which YieldCos buy, this is not an unreasonable argument. On the other hand, as long as YieldCos are using new share offerings at ever higher prices to increase distributions, IDRs are essentially an incentive to just do more deals using other people's money.

IDRs would do a much better job of aligning the parties' interests if they were defined in terms of distributions as a percentage of the average price at which shares had been issued.  As it is, IDRs create a perverse incentive to issue more shares whenever the stock price is high relative to previous issuance.

IDRs will reduce potential yields at these three YieldCos.

Conclusion

Investors have been seduced by rapid percentage dividend growth targets at the U.S.-listed YieldCos NRG Yield, NextEra Energy Partners, TerraForm Power, and Abengoa Yield. 

It is likely that these YieldCos will continue to meet, and sometimes exceed, these impressive targets; the growth will be fueled in large part by new share issuance at higher prices. Such share issuance allows dividends to rise while placing a cap on yield. In the case of YieldCos with IDRs, it also allows the YieldCos' parents to “earn” an incentive by spending other people's money.

Investors considering the purchase or sale of a YieldCo today should care more about current and future yield than they do about yield growth rates. Another way to think of yield is as the number of dollars of annual income for each $100 you invest in the YieldCo. Assuming distribution growth targets are met, the following chart shows how much income each YieldCo will produce over the next three years.

(Since TransAlta Renewables does not publish dividend growth targets, the corresponding numbers are the modeled dividend growth from issuing 20 percent and 50 percent more shares.)

If the investment objective is long-term income, it is clear which YieldCos are the most attractive.

Invest accordingly.

***

Tom Konrad is a financial analyst, freelance writer and portfolio manager specializing in renewable energy and energy efficiency. He's also an editor at AltEnergyStocks.com.  He will be an instructor at EUCI's "The Rise of The YieldCo" workshop on July 30th and 31st.  This article was first published on GreenTech Media and is reprinted with permission.

Disclosure: Tom Konrad and/or his clients have long positions in PEGI, HASI, RNW, and BEP. They have short positions in NYLD-A.

Disclosure: Long 

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.

July 08, 2015

Are YieldCos Overpaying for Their Assets?

Tom Konrad CFA

YieldCos buy and own clean energy projects with the intent of using the resulting cash flows to pay a high dividend to their investors. 

Several such companies, often captive subsidiaries of listed project developers, have listed on U.S. markets since 2013. So far, YieldCos have been a win-win: The developers that list YieldCos have gained access to inexpensive capital, and income investors have gotten access to a new asset class paying stable and growing dividends. 

So far, they have also gained from significant stock price appreciation. The seven U.S.-listed YieldCos are up between 21 percent for Abengoa Yield (ABY) and 136 percent for NRG Yield (NYLD) since they were listed.

However, some experts believe YieldCos are overpaying for projects. “We've seen them purchasing at prices we think don't make sense," said Chris Francis, the founder of Seven Waves Corporation.

Francis describes Seven Waves Corporation as a private YieldCo. Like its publicly traded cousins, Seven Waves invests in solar projects. The publicly traded YieldCos are his direct competitors, and their access to cheap capital “has made us adjust the prices” that Seven Waves pays for projects. 

Seven Waves has to meet the return objective of its investors, and the competition from YieldCos has made it “a very slim business, with not much meat left on it.” It is still possible for Seven Waves to acquire projects. It has had to adapt to a much more difficult environment, but Francis expects to close on the purchase of a 76-megawatt solar farm in the next few weeks.

What they are paying

Francis, like most financial professionals, evaluates the value of a solar project using the metric internal rate of return. IRR gives an interest rate or yield, which allows a project with cash flows that vary over time to be compared to a simple-interest-bearing investment like a CD or a bond.

Not all public YieldCos announce their acquisitions, and none of the ones that do have disclosed the IRRs for the projects they are investing in. TerraForm Power's recent announcement of its purchase of 23 megawatts of solar from Integrys is typical. 

It says, “These plants are expected to generate average levered CAFD of approximately $5 million annually over the next 10 years. The equity consideration to be paid for the acquisition is $45 million. In addition, TerraForm Power will assume $10 million in project debt. This represents an expected levered cash-on-cash return of greater than 9%.”

“Levered cash-on-cash return” is a lot less useful than IRR, in the same way that “payback” is a less-than-ideal way to evaluate the value of an investment in solar for your home. Payback is just the inverse of cash-on-cash return. In this case, payback is 11 years ($55 million cost / $5 million CAFD, also equal to 1 divided by the cash-on-cash return). Both payback and cash-on-cash return fail to account for inflation, depreciation, project lifetime, or anything that happens after the payback period. 

In the case of TerraForm's announcement above, we are told, “The assets were placed into operation between 2008 and 2013, and are contracted under long-term power-purchase agreements (PPAs) with a variety of commercial and municipal entities having a weighted-average credit rating of Baa2. The contracts have a weighted average remaining life of 15 years.” 

But the payback and cash-on-cash return would be the same if the projects had just been built and had PPAs that had a remaining life of 20 years or more, making them more valuable. Cash-on-cash return would also not change if the PPAs only had 10 years to run, and the solar farms were at the end of their useful lives.

Despite the weaknesses of the metrics cash-on-cash return or payback, these measures do not require assumptions about the long-term value of a wind or solar farm, and the truth is, no one really knows what that is. We don't know what the electricity market will be like in 15 years.

Will TerraForm be able to sign new PPAs at that time, and at what price? Francis says that YieldCos seem to be “very aggressive” about their assumptions about future electricity prices. Historically, electricity prices typically have always risen, and YieldCos seem to be assuming that they will continue to do so. Francis, on the other hand, thinks that the large-scale deployment of renewable energy will cause prices to fall, at least in the middle of the day when solar is operational, and at times of strong wind in areas that have significant wind penetration.

He says he sees YieldCos getting 4 percent to 6 percent IRRs. That corresponds to the range of IRRs I compute from the 7 percent to 10 percent cash-on-cash returns from YieldCo announcements (see charts below). The TerraForm acquisition referenced above is one of the better ones; it has an IRR between 5 percent and 7 percent depending on the assumptions made about revenue after the PPAs expire. 

The following chart shows a compilation of cash-on-cash returns gathered from YieldCo announcements where they can be calculated. Note that these numbers are not strictly comparable from one YieldCo to the next because of slightly different assumptions about how to treat assumed debt and what expenses are deducted from the project's expected cash flow. 

TERP's Integrys acquisition is shown at 11 percent, not the 9 percent cited in the press release, because I judged that removing the assumed debt from the purchase price made it more comparable to previous TERP announcements.

According to Francis, some unannounced acquisitions have even worse IRRs. One had an IRR of 1 percent when evaluated using Seven Waves' assumptions. He thinks that such purchases could only be justified if the buyer assumes a 10 percent to 15 percent increase in electricity selling prices for the second PPA, with ongoing 2 percent annual price increases after that. 

Such assumptions imply that utilities would be willing to pay far more for a PPA with an old solar farm than they would have to pay to construct a new one, given the widespread consensus that the price of new solar installations is likely to continue to fall, not rise. Francis observes that we have already seen some utilities trying to get out of PPAs in court. That does not bode well for their willingness to sign even more generous PPAs in the future.

Trends

Despite widespread talk that the market for clean energy projects is getting more competitive, I was not able to find a long-term trend of cash-on-cash returns over time. While some YieldCos such as TerraForm and Pattern Energy Group (PEGI) seem to be getting better returns than other YieldCos, most of the highest returns are on the smallest investments, as shown in the chart below. The labels and bubble sizes show the size of the purchase, not including assumed debt.

What we can see is that the pace of deals has been picking up. More of the deals shown in the chart closed in the first half of 2015 than in all of 2013 and 2014 combined.

Francis believes that this level of frenetic deal-making may soon come to an end. He thinks that when the federal Investment Tax Credit (ITC) falls at the end of 2016, it may lead to a short burst of deal-making as project developers leave the industry and sell off their existing farms. Some developers will continue to build farms, but at a more sedate pace, because it will be less lucrative without the ITC.

The effects on YieldCos

YieldCos can only raise dividends by acquiring more projects, or making the projects they have more productive. Both require cash to invest. Paying high prices (and getting low IRRs) for projects means that they have little or no money to invest after they pay their dividends. 

So far, rising share prices and secondary stock offerings have provided the funds for these investments, but this will only work if investors' giant appetite for YieldCo shares continues. That appetite for YieldCo shares depends on their expectations for continued dividend increases. 

Anything that disrupts either investor demand or rising YieldCo dividends will feed back to disrupt the other in a vicious cycle. Stagnating dividends will attract fewer new investors, and fewer new investors will be able to fund fewer of the acquisitions the YieldCos need to keep raising their dividends. 

In recent weeks, rising interest rates have begun to dampen investor demand for YieldCo shares. Will that or some later event like the ITC's sunset trigger the vicious cycle? We will only know in hindsight. 

As for Francis, rather than continuing to try to compete with YieldCos' cheap stock market capital, he's hoping that he can get access to some of his own by possibly taking Seven Waves public through a reverse merger with a listed company.

***

Tom Konrad is a financial analyst, freelance writer and portfolio manager specializing in renewable energy and energy efficiency. He's also an editor at AltEnergyStocks.com.  He will be an instructor at EUCI's "The Rise of The YieldCo" workshop on July 30th and 31st.  This article was first published on GreenTech Media and is reprinted with permission.

Disclosure: Tom Konrad and/or his clients own shares of Pattern Energy Group (PEGI) and TransAlta Renewables (TSX:RNW), and short positions in NRG Yield (NYLD).

Disclosure: Long 

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.

Where Are The Cellulosic Ethanol Gallons?

Jim Lane 

We've seen a number of high-profile cellulosic projects open in recent years, and not much ethanol being produced? Wondered why? Here are answers to your questions.

As Jack Webb used to say on Dragnet, just the facts, ma’am.

Fact one. There’s not much ethanol being produced at the new generation of cellulosic projects.

Fact two. We have seen significant changes in senior leadership at a number of key developers.

Industry rumor going around: Psst! These facts are linked!

For sure, Dorio Giordano has been appointed CEO at Beta Renewables, Dan Cummings has been tapped as president of POET-DSM, Abengoa (ABGB) Bioenergy CEO Javier Garoz has moved over to become CEO of Abengoa Yield, and this week former Segetis CEO Atul Thakrar was selected as the new President of DSM Bio-Based.

And it’s true, we’ve seen elongated commissioning periods for some cellulosic ethanol projects.

Officially, there’s no confirmation of a linkage. Every company loyalist denies it, every company cynic whispers it. Anything to it? Some, not as much as you’d think. There’s frustration around pace, that’s for sure.

The numbers

Officially, by the way, the outlook on cellulosic biofuels is relatively bullish in 2015 compared to 2014. Last year, there were 33.0 million RINs generated for cellulosic biofuels; this year, we’ve seen an impressive jump — in all, 36.9 million RINs for cellulosic biofuels as a whole.

But almost all of the production is Renewable Compressed or Liquified Natural Gas — last year 32.6 million RINs in all, compared to 728,000 RINs for cellulosic ethanol. This year, 668,940 RINs for cellulosic ethanol, through May.

Q&A

So, with four projects open in the US (INEOS Bio, Abengoa, POET-DSM and QCCP — not to mention Beta’s Crescentino project, and GranBio and Raizen in Brazil), you might have found yourself wondering of late, where is all the cellulosic ethanol? What’s taking so long?

Let’s take you through a quick Q&A.

Q: What is the official explanation for the slow production rates?

A: If you should inquire, you’ll be told “de-bottlenecking”.

Q: What exactly does that mean?

A: It will differ from project to project, but it generally means that some aspect of the final design has proven troublesome at scale, and is causing any or all of: a material shortfall in the rate of production, low titer (that is the concentration of fuel alcohol in the broth), excessive or noxious byproducts, the yield in terms of gallons per ton of biomass, excessive rates of catalyst destruction, or in the cost or yield in separating the product from catalysts, by-products, or catalysts.

Q: How long can de-bottlenecking take?

A: In a practical sense, anywhere from a handful of months to several years.

Q: Are multi-year de-bottlenecking periods usually expected?

A: If you speculated that a number of projects were expected by their parents to be producing by this time at significant volumes and generating cash, you would not be wrong.

Q: If there was one phrase you could offer to sum up the troubles, would it be “core technology failure?”

A: No. But we have heard “pre-treatment” frequently, though not universally.

Q. What about pre-treatment?

A: A few months before he died, Beta Renewables CEO Guido Ghisolfi spoke at length about “the front end problem,” as he called it, with The Digest. He pointed out that the bales of cellulosic material were coming in “dirtier” than had been expected. In Beta’s case, literally — dirt, rocks, mice, farm tools — a lot of junk was sneaking into the bales, and they installed a washing system to clean the biomass more throughly, as the debris was causing, at a minimum, reductions in productivity.

Q: But what about the entire pre-treatment approach?

A: We’ve heard grumbling about pre-treatment systems (that begin the process of liberating sugars from biomass). Specifically, that the new generation systems — which have, as examples, the promise of high sugar yields at lower enzyme loadings, less conversion of sugars to furfural and HMF, and lower capex and opex — are not producing the front-end results that are expected. But it generally it is all coming back, we hear, to higher degrees of biomass contamination than expected.

Q: You’ve mentioned a new system put in place at Beta Renewables? Any other delays at the other projects for retrofits like that?

A: INEOS Bio put in a new system last year, a hydrogen sulfide scrubber, when higher than expected rates of H2S were materially affecting the production organism.

Q: What was the word about that?

A: Last September, we wrote:

“According to the project team, “INPB has implemented a pilot project at the Fayetteville, Arkansas, facility to test the sensitivity of the fermentation process to HCN concentration. The pilot project involved installation of HCN scrubbing and water regeneration unit to prove that the concept of HCN removal and regeneration can be successful at full scale.

The Fayetteville, Arkansas, system proved that fermentation is operable on mulch syngas after removal of HCN and provided design data for the proposed HCN removal and control system at the Vero Beach facility. The Vero Beach system requires a third column to remove the HCN from the air used to regenerate the recirculated scrubber water.

According to INEOS Bio management, the scrubber technology will be installed and commissioned by October and the plant should be resuming normal operations by the end of the year.”

Q: How confident should we be that these technology problems will be solved?

A: Given that we have heard no clear indications of “core technology failure” from any party (from bullish company operatives to cynical industry observers), we can be reasonably confident that the companies will “figure it out” and reach the intended productivity levels, though actual timelines would be not much more than pure speculation at this stage.

Q: Why aren’t the companies more up-front and transparent about the difficulties? Don’t they see the risks in going stealthy during periods of adversity?

A: First of all, they see intransigence on the part of obligated parties relating to infrastructure, not stealthy cellulosic projects trying to reach steady-state operations, as the #1 risk factor for the RFS. #2 is the Obama Administration’s lack of faith in the RIN mechanism for getting round E10 saturation.

Secondly, corporate candor is one of those attributes, like greenhouse emission reduction, where they create a public benefit but not always a benefit that accrues directly to the corporation.

Q: We’ve seen a lot of biogas projects pop up, including the afore-mentioned compressed natural gas for CNG vehicles technologies, which have experienced fewer technology hassles and issued millions of RINs — will that trend continue?

A: For the time being, yes. And it shows the benefit of a technology and feedstock-neutral RFS. No one saw it coming that landfill gas CNG would outsell cellulosic fuel ethanol in 2015, but that’s the beauty of the market that RINs create.

Q: In his presentation on timelines to bring up new systems from installation to expected rates of productivity and uptime, what did Iogen CEO Brian Foody have to say?

A: He didn’t encourage thinking along the lines of “6 months or less to full production”, that’s for sure.

Q. In his presentation at ABFC 2015, Foody discussed the timelines to reach target production uptime in detail, for Iogen’s R6, R7 and R8 technology releases, right?

A. Yes. The R8 technology was the release eventually commercialized at Costa Pinto, Brazil in the Raizen project.

Q. How long did the de-bottlenecking take?

A. According to Foody, “expect everyone to struggle to achieve highly reliable commercial operation.” Specifically with the R6 release, the company took 10 months to reach 10% uptime, and peaked at 40 percent uptime one year after start-up.

Iogen-070215-4

Q. Issues?

A. A lot of unexpected results in the impact of handling large amounts of biomass — blockages and corrosion among them.

Q. Did results improve with the R7 release?

A. Yes, and you can see the tale of the tape, below. The project ultimately hit its “asset utilization” target of 80%, but it took a full 21 months to get there. A year beyond start-up, R7 was still at around 50% uptime.

Iogen-070215-3

Q. So, R8 was commercialized, so it must have gone much better, right.

A. Relatively so. Here’s the data, below. Hit the 80 percent uptime target in 10 months, and stayed there. But still, 10 months of struggle.

Iogen-070215-2

Q. What happens if you plot actual cellulosic ethanol production, as seen in the EPA’s RIN date, against the production capacity out there?

A. Iogen has conveniently done that for us. Here’s the data, below. What you can see is an industry moving along roughly the same performance timeline as Iogen’s R6 release.

Iogen-070215-1

Q. Suggesting that immature technology is in the field?

A. Possibly. But just as likely, that these companies experience steep learning curves as they seek steep increases in month-to-month production uptime.

Q. Bottom line?

A. It could be another year, or more, before we see anything like targeted uptimes at all of these projects.

Q. What can I do about it?

A. Preach patience. These are complex technologies, be generous in your assessment.

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.

July 06, 2015

Brew-ha-ha: Is Amyris' Brazillian JV Over?

Jim Lane amyris logo

In a Brazilian securities filing, with respect to the Joint Venture between São Martinho and Amyris (AMRS), Sao Martinho reports “the non-achievement of certain contractual targets by Amyris, impacting the viability of the project. Thus, Sao Martinho decides not to approve the continuation of the Joint Venture Plant construction with the US company Amyris Inc. and its Brazilian subsidiary Amyris Brazil Ltda.”

The company did not elaborate as to which contractural targets were not achieved by Amyris. In the filing, Sao Martinho added:

“Amyris may provide new information regarding the project feasibility in order to discuss a new deal potential. However, the Joint Venture and other contracts between the parties will be automatically terminated on August 31, 2015, if such date is not entered into a new agreement at the discretion of São Martinho.”

“Sao Martinho clarifies that the company did not make investments in the joint venture, which were scheduled to take place only after the start of plant operation.”

Amyris fired off a “clarification” shortly afterwards “regarding its inactive manufacturing joint venture with Usina Sao Martinho”, stating:

“[The] existing Brotas facility is exceeding targets and provides adequate capacity to meet its near and mid-term business needs. Amyris has been in discussions with Sao Martinho and is considering how the joint venture could best benefit Amyris’s future production capacity and achieve investment returns comparable to or better than Amyris’s best-in-class fermentation plant in Brotas. Based on these discussions, Amyris and Sao Martinho have agreed to explore, over the next 60 days, the best options for the joint venture.”

“We are excited about the continued strong performance and our ability to exceed our production and cost targets at Brotas,” said Amyris CEO John Melo. “Current production capacity at our Brotas facility meets our near- and mid-term growth plans and we have better economic options than our agreement with Sao Martinho initially contemplated. We are engaged in working towards a mutually beneficial agreement with Sao Martinho over the next 60 days. We continue to enjoy a strong presence and relationships in Brazil, including our more than 150 employees, our collaboration with Cosan, and our growing sales in personal care and industrial products for the Brazilian market.”

Amyris noted that the flexibility at the Brotas plant and space available potentially allows the company to double the capacity of this plant when required. In addition, the company is evaluating with Sao Martinho the best investment options available to determine which scenario would provide the best returns and balanced economics for both parties.

The Sao Martinho project

The joint venture dates some ways back, predating Amyris’ April 2010 IPO filing. in which the company stated:

“We plan to commence commercialization of our products starting in 2011 using contract manufacturers, and to have our first capital light production facility, our joint venture with Usina São Martinho, operational in the second quarter of 2012. As we commence commercial production of our initial molecule, farnesene, we expect to target specialty chemical markets.”

The company’s stock was upgraded to a $31 target by Raymond James in April 2011, citing amongst other factors the “company’s first large-scale production plant in Brazil – the joint venture with Grupo São Martinho – which should drive positive companywide EBITDA upon start-up in 2Q12.”

By Q1 2012, Amyris had reciognized “the operational challenges of translating yields in the lab to commercial-scale production,” and said that “following completion of the 50 million liter facility at Paraiso, it would focus on completing its 100M liter San Martinho project.” In late 2012, Cowen & Company was modeling “$146MM additional debt to fund losses and Sao Martinho capex in 2013-15.”

Meanwhile, Sao Martinho has downshifted its own emphasis this year on fuels. Last week, the company reported that “it will turn its attention to sugar production. It’s crushing ratio will be 52% for sugar and 48% for ethanol of 19.5 million metric tons of sugarcane, compared to 49% for sugar and 51% for ethanol during 2014/15.”

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.

July 05, 2015

Blue Sphere's First Revenue

by Debra Fiakas CFA

Blue Sphere (BLSP:  OTC) is continuing to make progress in its strategic plans to build and operate biogas power plants.  The company is initially targeting the largely untapped supply of organic wastes from food processing and table to meet growing demand for renewable, no– or low-carbon emission energy sources.  A year ago, the company’s portfolio consisted of a string of projects all in the planning stage.  Management has pushed two food waste-to-energy projects in the U.S.to the construction stage and closed on the first four acquisitions of fully operational agriculture-waste biogas power plants in Italy.  This progress has brought Blue Sphere to the cusp of revenue generation. 

We estimate the company could record first revenue from its Italy acquisitions in the third fiscal quarter beginning July 2015.  All four biogas plants are in operation and sell electricity to the country’s electric grid.  Each has a rated capacity of one megawatt power production through anaerobic digestion of agriculture waste to biogas that powers an electric generator.  The $1.3 million purchase price for each of the facilities will be paid in two installments.  Financing arrangements have been made through an Israel-based investment fund.  We expect final closing requirements to be completed by near the end of June 2015.   Another three deals are in the pipeline in Italy.

After several challenging months of negotiation Blue Sphere management has arranged financing and commenced construction on a 5.2 megawatt biogas power plant in North Carolina and a similar 3.2 megawatt facility in Rhode Island.  The Company has entered into joint ventures with investment fund York Capital, which is funding construction and working capital.  Blue Sphere will lay claim to 25% and 22.5% of the North Carolina and Rhode Island joint ventures, respectively.  Construction has begun on both projects with completion time within approximately twelve months.  We expect both plants to be operational in 2016.

The company is pushing forward with two additional ‘greenstart’ biogas plants.  Management is working to secure a power purchase agreement for a 5.2 megawatt plant planned near Middleboro, MA, where local governments are keen on keeping food waste out of landfills.  Another waste-to-energy biogas plant is planned near Ramat Chovav, Israel.  The project would for the first time give Blue Sphere an operating presence in its home country.
  
Shares of Blue Sphere traded off in recent weeks, most likely in response to the dilutive impact of note conversions to common stock.  Another element frustrating investors may be the joint venture arrangement for the North Carolina and Rhode Island biogas power plant projects that leaves the assets unconsolidated.  Shareholders will have to wait until those projects are fully operational to see earnings contributions to Blue Sphere’s financial reports.

On the brighter side, BLSP is trading under dramatically higher volumes than six months ago, suggesting that the market is clearing out share supply underpinning bearish sentiment in the stock.  Management clearly thinks the stock is undervalued after instituting a share repurchase plan and engaging a strategic investment advisor.
A report published by Crystal Equity Research published on June 18th,  indicated that BLSP is viewed as a speculative security and appropriate only for those investors with the highest tolerance for risk and volatility.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  Crystal Equity Research has published research on BLSP with generally favorable commentary.  Please read the important disclosures related to sponsorship and subscriptions in the final pages of all reports.

July 04, 2015

Alternative Energy Mutual Funds and ETFs Go In All Driections

By Harris Roen

Alternative Energy Mutual Funds, Solid Long-Term Gains

Alternative Energy Mutual Fund Returns

Returns for alternative energy mutual funds are virtually flat on average for the past three months, down slightly at a loss of 0.3%. The best short-term performer is Pax World Global Environmental Markets (PGRNX), up 2.1%… Over the longer term, returns for alternative energy mutual funds remain very strong. MFs are up 14.7% on average, with all companies showing double-digit gains on an annualized basis…

Returns for ETFs are ranging widely

Alternative Energy ETF Returns

Returns for ETFs are ranging widely, both in the short and long terms. The top performing alternative energy ETF over the past three years is Guggenheim Solar (TAN), up an impressive 34% on an annualized basis. In the short term, though, TAN comes out as the worst performing green ETF, down over -12% in the past three months… The wide variation in returns for these and other ETFs reflect both the volatile and promising nature of alternative energy investing…


DISCLOSURE

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

About the author

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

Ceres Focuses On Food & Feed After Bioenergy Disappoints

Jim Lane

Ceres logoIn California, Ceres (CERE) announced the a realignment of its business to focus on food and forage opportunities and biotechnology traits for sugarcane and other crops. As part of the realignment, the company will restructure its Brazilian seed operations and is exploring discussions with additional local partners and collaborators to support the continued development and commercialization of its technology in Brazil.

Earlier, the Company announced that due to the economic challenges faced by the Brazilian ethanol industry as well as changes in the global energy market, it had expanded the number of market opportunities available for its technology and products and began prioritizing its working capital in additional areas beyond Brazil.

The news may come as a surprise to the broader community, since in March 2015 the company signed a multi-year collaboration agreement Raizen, a joint venture of Royal Dutch Shell and Cosan, to develop and produce sweet sorghum on an industrial scale.

Also, in July 2014, Ceres was selected for a competitive grant and a multi-year credit facility to fund a product development project for sorghum and sugarcane for up to approximately 85 million reais, or 27.1 million U.S. dollars, under the Brazilian government’s PAISS Agricola program.

Going forward

The Company indicated that its Brazilian operations after implementation of this aspect of the restructuring plan would be focused primarily on sorghum breeding and sugarcane. In particular, the company plans to expand its sugarcane trait development activities for the Brazilian sugarcane market, which Ceres expects to fund, in part, under a grant available from the Brazilian government.

The restructuring of the Company’s Brazilian seed operations, which is expected to be substantially completed by October 31, 2015, includes, among other actions, a workforce reduction that will impact 14 positions in Brazil primarily related to administration, operations and manufacturing as well as 2 support positions in the United States. Ceres estimates that it will incur total charges of approximately $0.6 million over the next five months with respect to these workforce reductions in Brazil and the U.S., including $0.1 million in continuation of salary and benefits of certain employees until their work is completed and their positions are eliminated, and $0.5 million of one-time severance and other costs, all of which will be cash expenditures.

“These changes represent an important step in the transformation of our business as we refocus on our strengths in agricultural technology and direct our attention to markets being fueled by global prosperity growth,” said Ceres President and CEO Richard Hamilton.

He noted that bioenergy markets have continued to face serious near-term challenges due to low oil prices, the struggling Brazilian economy, delays in second generation refining technology and unfavorable government policies, among other headwinds. “If these challenges can be surmounted then I believe the market for bioenergy feedstocks can reemerge as a global opportunity for agricultural technology companies like Ceres.”

The long timeline to Brazilian ethanol success

In April, the company wrote in its quarterly report: “With industrial processing of sorghum feedstock generally well established in Brazil, we believe that field performance – primarily yields of sugars that can be fermented to ethanol – will largely determine the scale and pace at which our current and future sweet sorghum products will be adopted. Based on industry feedback, we believe that minimum average yields in the range of 2,500 to 3,000 liters of ethanol per hectare will be necessary to achieve broad adoption.

“While we achieved yields in this range in the 2013-2014 growing season in Brazil with multiple products in multiple regions, the 2014-2015 growing season in Brazil will be necessary to validate results. Additional growing seasons beyond the 2014-2015 season may be required to fully demonstrate this yield performance across numerous geographies and for our products to gain broad adoption.

The company added in April that, “Since 2010, we have completed various field evaluations of our sorghum products in Brazil with approximately 50 ethanol mills, mill suppliers and agri-industrial facilities. During this time, our sorghum seeds were planted and harvested using existing equipment and fermented into ethanol or combusted for electricity generation without retrofitting or altering the existing mills or industrial facilities.

On to brighter horizons

Ceres advises that “Our strategy is to focus on genes that have shown large, step increases in performance, and whose benefits are largely maintained across multiple species. Trait performance is evaluated in target crops, such as corn, rice and sugarcane, through multi-year field tests in various locations. In addition, we are deploying a new multi-gene trait development system internally and believe there may be opportunities to out-license the system, known as iCODE, to other crop biotechnology companies. To date, our field evaluations have largely confirmed earlier results obtained in greenhouse and laboratory settings…At this current pace, commercial sugarcane cultivars with our traits could be ready for commercial scale-up as early as 2018.

Blade Forage Sorghum Seed and Traits

In 2015, the company expanded its sorghum offerings to include hybrids for use as livestock feed and forage. In addition to direct sales efforts, Ceres entered into a distribution agreement with Helena Chemical Company, a leading distributor of crop inputs and services. Under the agreement, Helena will provide sales and customer support for our forage sorghum in the southeastern U.S.

The current hybrids, which are traditionally bred and do not yet contain biotech traits, have performed well in numerous commercial and multi-hybrid field trials. In a 2014, in a U.S. field evaluation, one of our leading biotech traits provided a greater than 20% biomass yield advantage in a commercial-type sorghum. In 2014, we received confirmation from the U.S. Department of Agriculture (USDA) that our high biomass trait was not considered a regulated article under 7CFR 340 of the USDA’s mandate to regulate genetically engineered traits.

The Bottom Line

NexSteppe has been reporting strong momentum in Brazil and there simply may have not been room enough for two companies in Brazil, given the slowdown in the ethanol industry.

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.

July 03, 2015

Total Doubles Down On Amyris' Jet Fuel

Jim Lane amyris logo

In California, Amyris (AMRS) announced that it has agreed on key business terms with Total for restructuring its fuels joint venture to open the way for proceeding with commercialization of its jet fuel technology over the coming years. Following the restructuring, Total would own 75% of the joint venture with Amyris.

BD-Amyris-022615-2

In conjunction with this transaction, Amyris has also agreed on terms with Total and Temasek, another major stockholder of Amyris, under which, and as part of a plan to strengthen the balance sheet, these stockholders would exchange an aggregate of $138 million of convertible debt for Amyris common stock at a price of $2.30 per share, with an additional $37 million of outstanding convertible debt being restructured to eliminate Amyris’s repayment obligation at maturity and provide for mandatory conversion to Amyris common stock.

Customers, ASTM on board

In September 2014, KLM tipped that it intended to fly on Amyris-Total renewable jet fuel, as soon as it receives favorable advice from their independent Sustainability Advisory Board. Amyris noted that is producing commercial product “for our launch partners (which include GOL), and that a 10% blend of Amyris-Total jet fuel can reduce about 3% of the particulate matter from aircraft engine exhaust.”

Last November, news filtered out of California that ASTM has revised the D7566, the Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons to include the use of renewable farnesane as a blending component in jet fuels for commercial aviation.

With that news, Amyris and Total said that they will now prepare to market a drop-in jet fuel that contains up to 10% blends of renewable farnesane.

Reaction from The Street

Cowen & Company’s Jeffrey Osborne wrote:

This conversion has a tangible effect on the ownership stake that both Total and Temasek has in the company. According to Thomson the companies own a combined ~24 million shares, which is around 30% of current shares outstanding. With the creation of 60 million additional shares, the combined ownership of Total and Temasek would be 84 million, or 60% of AMRS’ post-converted outstanding shares. We see this as confirmation that both companies see strong long-term potential for Amyris.

The reduction of convertible debt also improves Amyris’ balance sheet. Total debt, including a current portion of $18 million, was $242.5 million as of March 31, 2015. Upon the conversion of $175 million in debt the company will have reduced its total debt by 72% to $67.5 million. This should give Amyris greater flexibility as the commercialization of its various products continues to gain traction.

We see both of these updates as signaling a strong fundamental change in the company’s financial standing, as well as a solid validation of the viability of its jet fuel bioproduct. The terms of the restructuring are subject to standard closing procedures, including any approvals from the board or other internal requirements, as well as regulatory approvals.

Raymond James’ Pavel Molchanov wrote:

In aggregate, [it’s] $175 million of debt relief, equating to 72% of the company’s total debt burden as of 1Q15. If only Greece was able to get a deal like that! Naturally, there is no free lunch, and Amyris is giving up some future project economics. Specifically, Total will own 75% of the fuels joint venture with Amyris, up from the previously envisioned 50/50 split. But since this JV does not entail any meaningful revenue now, or even for the foreseeable future, Amyris gets the full deleveraging benefit upfront, with reduced JV economics only out in the distant future.

* In conjunction with this, Total has confirmed that it will proceed with commercialization of jet fuel under the JV. There is no real detail yet as far as the timetable, capital investment plans, or what the target economics might look like – all of those remain important question marks that will need to be addressed by management in due course. But it’s still a surprising move on the part of Total – surprisingly bullish, that is – considering the context of the oil and gas industry’s current period of austerity…Nonetheless, as a practical matter, we wouldn’t expect any production scale-up until around 2020, so it’s far too early for us to change estimates.

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.

July 02, 2015

Ten Clean Energy Stocks For 2015: Riding The Storm

Tom Konrad CFA

The first half of 2015 saw a mild advance in the broad market, but concerns about rising interest rates and the ongoing Greek debt drama sent income stocks, clean energy, and most non-US currencies down decisively.  My Ten Clean Energy Stocks for 2015 model portfolio has heavy exposure to not only clean energy, but income stocks (6 out of 10) and foreign stocks (4 out of 10.)  Despite this the stormy market for all three, the portfolio delivered admirably.

The model portfolio ended the second quarter up 9.7%, compared to its broad market benchmark, which was up only 4.4%.  Its clean energy benchmark is a 40/60 blend of its growth oriented benchmark and its income-oriented benchmark, matching the 4/6 ratio of growth and income stocks in the portfolio.  These two benchmarks are discussed below.  The blended benchmark fell 5.1%. 

For the month of June, the portfolio gained 3.1%, compared to only 0.8% for the broad market IWM and a 6.2% decline of the blended benchmark.

Value/Growth and Income Sub-Portfolio Performance

The four stock value and growth sub-portfolio reversed most of its previous losses in June,  up 7.4% for the month to end the first half down only 0.4% for the year.  Its benchmark, the Powershares Wilderhill Clean Energy ETF (NASD: PBW), fell 3.8% for the month but remains in the black with a 2.3% gain for the first half.

The six stock income sub-portfolio inched up another 0.3% on top of its already impressive gains, ending up 16.4% year to date, despite rising interest rates.  The income benchmark fared much worse.  This benchmark was The Global Utilities Index Fund, JXI for the first 5 months, replaced by the more clean-energy oriented Global X YieldCo Index ETF (NASD:YLCO) when that began trading at the end of May.  It dropping 5.3% for the month for a loss of 7.7% year to date, despite the fact that YLCO fared better than JXI in June.

The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of the month's news for each stock.

10 for 15 Performance
Chart

The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Annual Dividend: $1.04.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
6/30/2015 Price: $20.05. YTD Dividend: $0.52  YTD Total Return: 44.6%.

Sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong started the month strong, and I hope some of my readers took the opportunity and followed my lead by taking some gains as it briefly rose above $21.  At that point, Bank of America broke it's long climb by lowering its rating to Neutral based on valuation.  This is in-line with my own assessment: I like Hannon Armstrong for the long term, but, because of its much higher price than when it began the year, no longer feel that it deserves to be such a large part of my managed portfolios.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
6/30/2015 Price: $19.73. YTD Dividend: $0.18  YTD Total Return: 33.6%.

International manufacturer of electrical and fiber optic cable General Cable Corp. rose strongly on the news that it had sold the rest of its Asia Pacific operations for $205 million.  This was a significant step in its ongoing reorganization, which has the goals of simplifying its geographic portfolio, reducing debt, and improving profitability.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Annual Dividend: C$0.84.   Low Target: C$10.  High Target: C$15. 
6/30/2015 Price: C$12.36. YTD Dividend: C$0.39  YTD Total C$ Return: 11.1%. YTD Total US$ Return: 3.3%.

Unlike most of the other income picks, Yieldco TransAlta Renewables fell 2% in June, deepening the undervaluation which made me predict it would rise in the last update.  The decline was likely in sympathy with the larger, interest rate related, decline of Yieldcos and utilities in general (down 5.3% and 7.7%, as discussed above.)

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. 
Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
6/30/2015 Price: C$2.99. YTD Dividend: C$0.15  YTD Total C$ Return: -1.9%.  YTD Total US$ Return: -8.8%.

Canadian power producer and developer (Yieldco) Capstone Infrastructure also declined 2.3% despite my prediction for this stock.  As with TransAlta Renewables, I believe the decline was industry related, not specific to Capstone.  In fact, the company announce progress with its wind projects in Ontario, where it received a final Renewable Energy Approval from the Ontario Ministry of the Environment and Climate Change for the 10-megawatt Snowy Ridge Wind Park.

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

12/31/2014 Price: C$13.48.  Annual Dividend: C$0.62.  Low Target: C$10.  High Target: C$20. 
6/30/2015 Price: C$15.48.  YTD Dividend: C$0.30  YTD Total C$ Return: 17.1%.  YTD Total US$ Return: 8.8%.

Leading North American bus manufacturer New Flyer got a very favorable write-up at Seeking Alpha, including speculation that its Brazillian partner, Marco Polo, might acquire the 80% of the company it does not already own in a buy-out.  I'm a little skeptical about such buy-out speculation- I think both companies seem to be benefiting well from the alliance as it is, but I agree that New Flyer remains an inexpensive company with a dominant position in the North American bus industry, which continues to rebound from a long slump. 

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Annual Dividend: €0.61.  Low Target: 12.  High Target: €20.
6/30/2015 Price: €16.65. YTD Dividend: 0.61  YTD Total Return: 26.9%.  YTD Total US$ Return: 16.8%.

Despite Greek wobbles, bicycle manufacturer Accell Group, which makes most of its sales in Europe, maintained its balance with the stock up 2% for the month and 17% for the first half.  The company is a leader in e-bikes, and introduced its own "mid-motor" (i.e. near the pedals so that the motor can take advantage of the bike's gears) with hardware supplied by Yamaha.  Mid-motors are a premium option, offering better balance, efficiency, and handling than the more common hub motors, but are more complex and come with a higher price tag.

Value Stocks

7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02.  Annual Dividend: $0.24.   Beta 0.36.  Low Target: $10.  High Target: $20.
6/30/2015 Price: $12.87 YTD Dividend: $0.12.  YTD Total Return: -0.2%.

Alone among my three predictions for stocks to perform well in June, biodiesel producer FutureFuel did not disappoint.  The company gained 8% for the month on the EPA's proposed biomass-based diesel volumes for 2014-2017, which were announced on the last trading day of May.  I predicted that the targets, which were good news for biodiesel producers, would continue to propel the stock upward in early May.  That turned out to be the case, and the stock stayed above $13 for most of the month before giving back some of its gains in the recent market turmoil. 

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
6/30/2015 Price: $5.80. YTD Total Return: -30.5%.

Solar and rail Real Estate Investment Trust Power REIT's stock fell briefly below $5, a price at which I think it represents a good buy despite the negative summary judgement in March. 

The two remaining issues in the lessee's civil case against it will go to trial in August.

The lessees, Norfolk Southern (NSC) and Wheelling and Lake Erie (WLE) claim that Power REIT and its CEO, David Lesser, acted fraudulently when Power REIT was created and the Pittsburgh and West Virginia (P&WV) (which owns the leased property) became its subsidiary through a reverse merger.  They are claiming damages in the amount of approximately $140 thousand based on interest on funds withheld by third parties, which NSC and WLE claim is due to Lesser's actions.  It seems to me that if interest is owed, it would be by the third parties.  But, given my track record predicting the court's rulings, readers should form their own opinions.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
6/30/2015 Price: $7.65. YTD Total Return: 9.3%.

Energy service contractor Ameresco released the usual press releases about new contracts.  Given the timing of the rally, my best guess is that the company attracted the interest of one or more institutional investors by presenting at ROTH London Cleantech Day.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Annual Dividend: $0.  Beta:  0.78.  Low Target: $5.  High Target: $20.
6/30/2015 Price: $7.77. YTD Dividend: $0.  YTD Total South African Rand Return: 26.3%.  YTD Total US$ Return: 19.8%.

Vehicle and fleet management software-as-a-service provider MiX Telematics published its annual report, which seems to have boosted the stock slightly.  The annual report does not contain information which was not included in its annual results, published at the end of May, but could have drawn the attention of investors to its long term progress.  As I discussed last month, the annual results were very encouraging, and MiX continued to trade at a fraction of the valuation of its developed-market peers.

The Annual General Meeting was also set for September 11th.

Predictions

Last month, I predicted TransAlta Renewables, Capstone Infrastructure, and FutureFuel would advance in June.  The sharp decline in utility and Yieldco stocks prevented the advance and led to a small decline in the first two, but FutureFuel advanced strongly, pulling the average gain to 1.1% for the three stocks.  Over the past four months, I've managed to pick 7 out of 9 monthly winners, my average pick has advanced each month. 

While I'm satisfied with both my overall track record and my monthly picks, I don't encourage readers to trade based on my monthly hunches: Transaction costs would probably cost more than my market timing would help.  That said, for readers new to the list, these monthly picks have so far proven to be among the best stocks to buy if you have new money to invest.

Since the monthly picks have so far seemed useful, I'll continue my predictions.  Although it did not work out last month, I'll be sticking with Capstone and TransAlta Renewables.  Despite rising interest rates, both are trading at excellent valuations.  Also, I feel the rapid decline of income stocks over the last couple months is due for a pause or even a small rebound.

Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, PW-PA, FF, BGC, RNW/TRSWF, REGI.  I am the co-manager of the GAGEIP strategy.

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.

July 01, 2015

Chinese Solar Turmoil Brings Crowdfunding and Internet Interlopers

Doug Young 

Bottom line: Yingli’s use of crowd-funding to finance a small project and the bargain sale price of a small polysilicon maker reflect continuing struggles at second-tier solar companies and the need for more consolidation.Yingli logo

Two solar energy stories are showing how overcapacity continues to haunt the sector 2 years after it began to emerge from a major downturn. The first involves a desperate-looking fund-raising plan from the struggling Yingli (NYSE: YGE), which is trying to use crowd funding to pay for a new solar plant. The other news involves another slightly bizarre investment in the space, with Internet titan Tencent (HKEx: 700) and real estate giant Evergrande (HKEx: 3333) paying a bargain price for Mascotte (HKEx: 136), a money-losing Taiwanese maker of polysilicon, the main ingredient used to make solar panels.

Both of these deals look strange for different reasons that reflect the lingering state of turmoil in a solar panel sector plagued by excess capacity. Many of the weakest players have closed or been purchased over the last 2 years, with names like Suntech and LDK disappearing as independent companies. But a relatively large field of second-tier players like Yingli still remain in business and probably need to either close or get acquired before the industry can truly return to health.

Let’s start with Yingli, which proudly proclaims in its latest announcement that it is bringing solar financing to the masses by giving average people the chance to invest in a small new solar power plant. (company announcement) The plant is based in Yingli’s home province of Hebei, hinting that it used its local connections to get the project build. The plant has a modest capacity of 4 megawatts, and was funded with the sale of 20 million yuan ($3.2 million) in bonds.

Two Chinese companies provided the project’s original financing, but now it appears they want to sell their stake to average consumers via an online platform that resembles the popular crowd-funding model. The fact that these big investors are looking to sell their stake to unsophisticated consumers shows their own lack of confidence in the project, and the overall move really looks like desperation.

Yingli is the weakest of China’s major solar panel makers to survive the downturn so far, and this kind of move shows just how shaky its finances are. The company shocked investors in May when it said it was in danger of going out of business, even though it later said its statement was misinterpreted. (previous post) This kind of move to raise money through crowd-funding certainly won’t help to restore confidence in the company, and it’s still possible we could see Yingli ultimately fail this year or next.

Next there’s the other deal that has seen Tencent and Evergrande take a majority 75 percent stake of Mascotte for HK$750 million ($100 million). (company announcement; English article) The purchase price represents a whopping 97 percent discount to Mascotte’s last stock price before the announcement, which actually came last week.

A quick look at Mascotte’s latest financial statement, which was released after announcement of the Tencent and Evergrande investment, shows why the company so desperately needed the new money. Mascotte lost HK$129 million last year, which was actually an improvement over the $547 million it lost the previous year. Still, so many losses over consecutive years meant the company was probably out of funds and unable to find anyone to lend it new money to continue its operations.

The involvement of Tencent in this transaction looks a bit strange, as the company has never invested in this kind of new energy deal before. But that said, big tech names like Apple (Nasdaq: AAPL) and fast-rising online video firm LeTV (Shenzhen: 300104) seem to be suddenly piling into the space, perhaps as a form of public relations to show their commitment to environmental protection. Such investments have so far been quite small, and in this case Tencent won’t feel too much pain if Mascotte fails, which looks like a strong possibility over the next year or two.

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

« June 2015 | Main | August 2015 »




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