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April 30, 2016

SunEdison: Giving Optimism A Bad Name

by Paula Mints

Potentially stranding a significant number of solar development plans as well as some assets, SunEdison (SUNE) finally took the step that many expected and filed for bankruptcy. Pondering where things went wrong for the troubled firm leads to a winding road of overexpansion, debt and the traditional sidekick of highly visible companies and people, hubris.

Hubris, of course, happens quite often in the corporate world and there is a long list of companies that were swayed by it – who knows, one is probably being swayed at this very minute.

In the solar industry, hubris and desperation are often intertwined. Solar companies operate in a reality that includes aggressive pricing, push-pull incentives and subsidies and end user/government expectations that are nearly impossible to meet if maintaining a margin is important. In this environment panic, desperation and expediency can lead to poor decision making while companies that become highly visible and envied can fall victim to their own PR and end up making decisions in a vacuum. The problem with vacuum decision making is that
it is almost always divorced from reality. Ignoring reality can, well, lead to bankruptcy.

In 2015 SunEdison delayed its filings and launched an internal audit. In 2016 though the internal audit found no evidence of fraud it found problems with the company’s overly optimistic outlook and its lack of sufficient controls and procedures as well as its untimely reports to its board.

This may be the first time that poor decision making and careless processes and controls have been blamed on optimism.

Blaming mistakes on executive optimism – even by inference, could give optimism a bad name and this would be a shame because healthy optimism is a good thing. Healthy optimism has kept many an individual and even companies afloat during tough times. Healthy optimism works hard to make its vision come true while not ignoring the potential of failure. Healthy optimism does not march over a cliff because it believes it can fly.

Blaming SunEdison’s current struggles on optimism and poor processes is a glaring understatement that soft peddles breathtakingly bad executive decision making.

Many a CEO has become tone deaf to warnings referring to those bearing cautious news as naysayers while being shored up by those who are paid well to agree. After all, when you are riding high people willingly agree with you. Once you fall these same people will be the first to say they saw the cliff you were heading towards as they enjoy watching you charge over its edge.

In the wider context, it will encourage those who believe the solar industry is hiding behind industry-wide unreasonable and unreasoning optimism something to point to – just as they still point to Solyndra.

In October we covered the SunEdison situation was covered from the perspective of company behavior following SunEdison’s acquisition by MEMC.  You can find that analysis including a detailed timeline of its history here.

To that timeline we now add:
  • 2016 January: TerraForm (TERP) shareholder Appaloosa Management sues to stop SunEdison’s acquisition of Vivint (VSLR).
  • 2016 March: Vivint cancels SunEdison acquisition.
  • 2016 March: US Justice Department launches an investigation into SunEdison’s financing activities and the SEC begins investigating the company’s disclosures to investors
  • 2016 April: SunEdison’s internal audit finds no evidence of fraud but plenty wrong with internal procedures
  • 2016 April, Vivint sues SunEdison over failed merger
  • 2016 April, SunEdison files for bankruptcy.
A short and incomplete list of solar companies that have failed includes Advent Solar, SunFilm, SpectraWatt, Abound Solar, Konarka, SatCon, Solar Millennium, SolFocus, Suntech, Abengoa (ABGB), Evergreen Solar, Q-Cells and now SunEdison. Almost all Chinese solar manufacturers built their companies and maintain their businesses on a mountain of debt. Some companies emerge from bankruptcy either through acquisition (Q-Cells and Suntech) or through restructuring – potentially Abengoa and SunEdison. Recovery is not a given.

A company strategy based on underbidding to win projects, growth that relies on highly public incentives to stimulate demand, poor expansion and investment choices and reliance on debt is operating in an unhealthy ecosystem.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was originally published in the April 30 issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

April 29, 2016

Amyris Inks $100M+ Biofene Supply Pact

Jim Lane

In California, the Eco-Emirs of Emeryville, Amyris (AMRS) executed a five year Biofene supply agreement with a global nutraceuticals company.

Upping the ante from January

This new, long-term agreement replaces the parties’ one-year purchase agreement, which was previously announced on January 4, 2016. More on that deal here.

Under the new supply agreement, the mystery customer has agreed to a larger Biofene purchase in 2016 with an expected revenue contribution of approximately $9 million and to minimum annual purchase commitments in each of the remaining years of the agreement.

In addition, under the new agreement, Amyris is entitled to a quarterly value-share arrangement on the sales of the customer’s product made from the purchased Biofene. Amyris expects total revenue from the five-year agreement to be more than $100 million. In year-five of the supply agreement term, the agreement is projected to generate approximately $40 million of annual revenue, which Amyris expects will be renewed at that level in subsequent years.

A 2016 Farnesene Fiesta?

For biofene, the Brotas plant in now sold out through 2020. We look at Amyris’ 2016 horizons here.

The Amyris Story

John Melo discusses Amyris’ immediate horizons with The Digest and BioChannel.TV.

Also on BioChannel.TV, Amyris is the first company up in this episode from March Madness, 50 Hot Companies 50 Quick Takes, here.

The Amyris 2016 8-Slide Guide is here.

The Latest on Amyris Biossance is here.

Amyris debuts Pathways Program: access to its synthetic biology technology.

Reaction from Planet Amyris

“This agreement represents a new highly disruptive partner application for our flexible Biofene ingredient ─ which supports multiple broad-based market applications and further solidifies Amyris’s track record of helping solve partners’ supply and product margin needs by supplying cost-advantaged renewable ingredients that perform better than current supply sources,” said CEO John Melo.

“We are experiencing significant growth in demand for our Biofene and Biofene-derivative applications from large markets such as tires, industrial lubricants, solvents, and nutraceuticals. This demand growth is accelerating our mission to make renewable products mainstream while making our company sustainable.”

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.

April 25, 2016

Net Metering Is the Solar Industry’s Junk Food

Shoppers who bring reusable bags to the grocery store buy more junk food.

This example is part of a growing body of behavioral psychology research showing that when we feel good about ourselves for doing one thing right, we give ourselves permission to be careless in other areas.

The solar installation industry seems to be falling into the "reusable shopping bag" trap. Solar itself is the reusable shopping bag. The junk food is net metering.

Net metering is a simple, intuitive way to pay for solar generation at retail rates. But it puts solar companies on a collision course with regulators trying to protect non-solar customers from cost-shifting. Solutions to this conflict exist and have the potential to unlock an even brighter future for the solar industry.  

Net metering pays owners of distributed solar for their excess power generation at the same price they would pay for power from the grid. When solar is a small fraction of the generation on the grid, this is a great deal for utilities and other ratepayers: solar generation occurs during the day, when electricity demand is typically higher and wholesale prices are also high. This is crucial on hot summer days when air conditioners drive up peak loads.

Net metering becomes less attractive for utilities as solar penetration increases. Hawaii and California are seeing this already.

Because electricity transmission is hard to build and storage is expensive relative to electricity generation, supply must be locally and instantaneously matched with demand. When lots of generation comes from variable, price-insensitive resources like solar, the grid suffers from too much of a good thing. In the middle of the day, solar production starts to meet and eventually surpasses daytime peak demand, and the value of electricity falls. Low prices during the day mean that more flexible forms of generation need to make profits when solar production is low, increasing prices and the value of electricity at night and on cloudy days.

This process puts utilities and regulators in a bind. The conflict can hurt both sides of the utility-customer relationship.

The Nevada Public Utilities Commission’s decision to end net metering for both old and existing customers may seem like a victory for the utility, but it is a Pyrrhic victory at best. 

When only a small fraction of the electricity on the grid comes from solar (low penetration) in any part of the grid, net metering is a subsidy to the utility, not the net-metered customer. But rather than replacing net metering with something that would encourage distributed solar where it would be most useful, Nevada has driven solar installers from the state. 

The decision did the greatest damage to solar customers who had the rules changed on them retroactively, and many of them will now never recover their solar investments. It also hurt other ratepayers who might have wanted to go solar in the future, and robbed all ratepayers of the benefits of any such installations to the grid. They are also robbing the planet of an opportunity to cost-effectively reduce carbon emissions.

The retroactive removal of net metering is also increasing uncertainty among large-scale energy developers, who reasonably wonder if something similar could happen to them.

How the conflict over net metering can be an opportunity

Must solar companies’ gain be a utility loss? Hardly. The key is to learn from the principles of stakeholder capitalism and turn the seeming tradeoff into an opportunity.

Speaking at the 2016 Conscious Investors Summit, R. Edward Freeman, the academic director at the Institute for Business in Society of the Darden School and the University of Virginia, made the point that tradeoffs are a managerial failure.

Freeman explains that when you treat employees and managers like jackasses, with carrots and sticks, they start acting like jackasses. When you treat them like human beings who crave a sense of purpose, they work with passion and deliver creative solutions to seemingly intractable problems. 

The solar/utility conflict is far from intractable, but for now, both sides are acting like jackasses. Utilities deride net metering as a subsidy from customers who can’t install solar to those who can, while the Solar Energy Industries Association publishes principles stating that customers should always have net metering as an option.

Both sides should stop acting like jackasses and seize the opportunity instead to focus on the tradeoff.  

A solution already exists. This is the value-of-solar tariff, where solar customers are paid for the value of the electricity they produce at the specific time and place they put it on the grid.

Under a value-of-solar tariff, non-solar customers cannot subsidize solar customers (a common utility claim about net metering). By definition, under a value-of-solar tariff, solar customers are paid only for the value they bring to the grid. They won’t be subsidized by other ratepayers simply because they are only paid for the value they create.

Untapped potential

Not only can a value-of-solar tariff resolve the conflict between solar and non-solar customers, but it can also unlock opportunities for solar which are currently being squandered under net metering. 

Under net metering, the incentive is to install solar so that it produces the maximum possible amount of electricity. This means pointing the panels south, at latitude tilt. Under a value-of-solar tariff, the incentive is to produce as much value for the grid as possible, which often means pointing panels west or southwest, in order to help service peak air-conditioning loads on hot days, which usually occur in the afternoon. Such decisions depend on both the local climate and on the local loads on the grid.

They also depend on getting the value of solar right. This is where we need creativity from all parties working together.

The paradox of doing good

Few people expect much creativity from utilities -- although there are notable exceptions, especially when it is the regulator driving change.

The solar industry is another matter. Almost all solar companies portray themselves as working for the good of the planet, and most of those genuinely believe that is what they are doing.

That’s where the reusable bags conundrum comes in. The mental accounting that allows a shopper to offset junk food indulgence with shopping bag virtue also seems to be affecting the solar industry as a whole.

If the solar industry were a person, it would be thinking: “I’m doing something great for the planet, so I don’t need to worry about all the non-solar ratepayers my actions might hurt. As long as the greater good is being served, it’s not my problem.”

It’s a pity that solar companies, which are doing so much good for the planet by displacing fossil fuels, are falling into the same trap as shoppers who displace plastic bags with reusable, but then poison themselves with junk food.

More solar companies need to stop substituting doing good for being good, and start living up to their true ideals. Solar has the potential to help all users of electricity, not just those who can install it themselves. A value-of-solar tariff can unlock that potential, as long as we have the creativity and courage to take everyone’s interests into account.

Getting a value-of-solar tariff right will be tricky, but creativity in the pursuit of a greater good is precisely what stakeholder companies excel at.

If all parties work toward a well-calibrated tariff, everyone will have the incentives they need to get the most out of future solar installations. Solar companies will get more business deploying solar where it does the most good. Regulators will see that all ratepayers are treated fairly. Utilities will find that new solar is connected to the grid where it makes it easier, not harder, to balance supply and demand.

Some people will still want to install solar even where the new supply is difficult to integrate, but a value-of-solar tariff will give them the incentive to install it with electronics and storage that makes the new supply easier to manage, or the price will be low enough that it will make sense for the utility to make the changes needed to handle it.

This kind of dynamic tariff is also likely to catalyze demand management, energy storage, and other industries we have not even thought of -- all of which will add jobs, create value, and help unlock the potential of solar.

Perhaps the solar industry and utilities can both have their cake -- and eat it together.

April 21, 2016

Water Utilities Keeping The Flow In Cash Flow

Fiakas Water Utilities Keeping The Flow In Cash Flow

by Debra Fiakas CFA

After a long series of posts on suppliers of water infrastructure, from fire hydrants to filters and from taps to treatments, it is now time to look at the companies selling water.  The majority of water utilities is owned by municipalities and is beyond the reach of investors.  However, there is a clutch of publicly traded companies that peddle water as a business.

Which water utilities make sense to return hungry and risk wary investors?

A short list of publicly traded water utilities in the U.S. reveals a diverse group of large and small companies.  American Water (AWK:  NYSE) is by far the largest operation after reporting $3.2 billion in revenue in fiscal year 2015. American Water serves 1,600 communities in 16 states in the U.S. and Canada with potable water delivery and waste water collection. The smallest company in terms of revenue is York Water Company (YORK:  Nasdaq), which delivered $47.0 million worth of water to customers in Pennsylvania last year.

Water Utility Market SYM Sales Mill
American States Water California  AWR $458.6
American Water 1,600 communities in 16 states AWK $3,160.0
Aqua America PA, OH, TX, IL, NC, NJ, IN and VA WTR $814.2
California Water Service CA, WA, NM CWT $588.4
Connecticut Water Service Connecticut, Maine CTWS $95.9
Middlesex Water Company NJ, DE, PA MSEX $123.2
SJW Corporation San Jose, California SJW $305.1
York Water Company Pennsylvania YORW $47.0

After all the discussion of water system failure, water contamination and the need to treat water destined for our kitchen faucets, a review of water utilities must include a review of financial strength.  Some investors might scrutinize leverage ratios and profit margins.  I prefer to look at how good a company is at turning sales dollars into operating cash.  After all, it is operating cash that pays for capital investments.  The winner in my contest is Aqua America (WTR:  NSYE), which converted 45.5% of its $814.2 million in revenue in the last fiscal year to operating cash flow.  The least proficient cash builder in the group is American States Water (AWR:  NYSE), which only turned each sales dollar into 20.7 cents.  That is still an impressive cash conversation ratio and goes a long way toward supporting capital spending programs to maintain and improve water delivering infrastructure. 

SYM Sales Mill CFO Mill CFO/Sales
AWR $458.6 $95.1 20.7%
AWK $3,160.0 $1,180.0 37.3%
WTR $814.2 $370.8 45.5%
CWT $588.4 $144.6 24.6%
CTWS $95.9 $37.8 39.5%
MSEX $123.2 $39.3 31.9%
SJW $305.1 $97.3 31.9%
YORW $47.0 $18.5 39.3%



Aqua American may be the strongest in the group in terms of generating operating cash flows, but it is also among the most expensive stocks.  Its shares trade at 6.9 times sales - well above the group average of 4.7 times trailing sales.  The story is the same in terms of earnings and cash flows.  The supplier of water to the San Jose, California community, SJW Corporation (SJW:  NYSE), is the only one in the group that trades below the average in terms of sales, earnings, cash flows and book value. 

AWR 3.2 25.3 15.8 3.2
AWK 4.0 27.0 10.8 2.5
WTR 6.9 28.0 15.4 3.3
CWT 2.3 29.8 9.3 2.1
CTWS 5.4 22.4 13.9 2.3
MSEX 4.7 30.4 14.9 2.8
SJW 2.5 20.1 7.9 2.0
YORW 8.7 32.9 22.4 3.8

Average 4.7 27.0 13.8 2.8

The relative value of SJW is interesting, particularly given the apparent optimism that analysts have for the company’s future.  Analysts have projected slowing growth for water utilities over the next five years.  The average future growth rate for our group of eight companies is 6.6%, but SJW is at the top end of the range with a 14% projected growth rate. Middlesex Water brings up the rear with a 2.7% growth rate projection.

The ratio of Price/Earnings-to-Growth Rate provides a logic check for investors in comparing earnings multiples.  SJW wins this contest as well with a ‘PEG Ratio’ of 1.44 compared to the average of the group of 5.26.   Still the target PEG Ratio is 1.00 so it appears investors are paying a premium for the growth that SJW has to offer.

Earnings and growth are only part of the picture for water utilities.  All of them pay a dividend.  The forward dividend yield for our favorite SJW Corporation is 2.2%, which is exactly the group average.  So dividend yield should be considered right along with growth potential.  Utility stocks also typically offer shareholders lower risk than other sectors, justifying higher multiples relative to yield and growth.  The average beta for our group is a modest 0.42. 

SYM Yield Growth
AWR 2.2% 3.9%
6.58 2.63 1.67
AWK 1.9% 7.6%
3.55 0.82 0.65
WTR 2.2% 5.9%
4.79 2.58 1.87
CWT 2.5% 9.1%
3.29 2.21 1.73
CTWS 2.3% 5.0%
4.49 0.72 0.49
MSEX 2.2% 2.7%
11.24 6.18 3.39
SJW 2.2% 14.0%
1.44 0.34 0.30
YORW 1.9% 4.9%
6.71 3.96 2.84

Average 2.2% 6.6%
5.26 2.43 1.62

Considering dividend yield as well as growth and adjusting each ratio for risk, our favorite SJW still dominates the group.  Its PERGY (Risk Adjusted Price/Earnings to Growth Plus Yield) ratio is 0.30  -  the lowest in the group. The shares of SJW may be the best value in the group, but it is worthwhile to point out that Connecticut Water Service (CTWS:  Nasdaq) with its 2.3% dividend yield is in second place.   Connecticut Water also appears to be a strong operator with a 39.5% sales-to-cash conversion ratio in the last fiscal year.

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.

April 20, 2016

Biobased’s Hot Babes Hook Up

Comet, BioAmber in big cellulosic sugar partnership

Jim Lane

In Ontario, Comet Biorefining has signed an off-take agreement with bio-succinic acid producer BioAmber (BIOA) for cellulosic dextrose from Comet’s upcoming first commercial plant in Sarnia, Ontario. The dextrose will be produced from agricultural residues using Comet’s innovative technology.

The agreement also provides increasing shape to the development of an biobased industrial cluster in the Sarnia region of Ontario — a corn-growing region where farmers will provide agricultural residues which will be processed into industrial-grade cellulosic dextrose by Comet. In turn, BioAmber will be the offtake partner for those sugars, and use its own proprietary technology to produce biobased succinic acid and high-value derivative chemicals including 1,4-butanediol (BDO) and tetrahydrofuran (THF).

The off-take agreement also includes provisions for Comet to supply dextrose to future BioAmber manufacturing facilities and provides BioAmber with certain exclusive rights in the fields of succinic acid, BDO and THF. BioAmber itself is the subject of an historic set of off-take agreements, including those with Mitsui and Vinmar for global distribution of its renewable chemicals.

The partners also noted that Comet’s facilities can be built on a smaller scale enabling greater flexibility to locate production closer to biomass supplies and lower a region’s greenhouse gas footprint.

BioAmber investing in Comet

The companies disclosed that BioAmber had provided an equity investment in Comet in 2015 and its CEO Jean-Francois Huc is now joining Comet’s board of directors.

Where’s the feedstock?

The off-take agreement is the culmination of development work performed by Comet and BioAmber as part of BioIndustrial Innovation Canada’s recently completed cellulosic sugar study.

The one remaining question in the supply chain from cornfield to customer is how the supply-chain will be managed to assemble agricultural residues for Comet’s process.

Questions abound.

How these will be shipped, stored, avoid pre-fermentation or fire incidents that have been experienced at other cellulosic depots. How the payments will be made to growers, how the logistics of delivery will be arranged. How indeed the residues will be cleaned of dirt, dust, tennis shoes, rakes, combine harvester parts, metal scrap and other items that have come into cellulosic refineries from the field. Whether the bales will be square or round, how they will be tied and untied, where they will be stored from harvest to delivery to the factory gate.

How will the material be pre-treated at scale, how will it be chopped down into fragments small enough for the process to handle, at a rate and cost commensurate with the economics of the overall project?

How the greenhouse gas emissions will be calculated and audited, and how the process will be certified for sustainability — for those chemical off-takers of BioAmber’s interested in certifying to their own customers that these new materials are contributing to a low-carbon society, and by how much?

All examples of standard questions that companies must answer, for themselves or in partnership with logistics companies. It’s not the same as the corn or cane economy — not by the longest shot, and though Comet has doubtless with its partners in Sarnia and in the BioIndustrial Innovation Canada roundtables worked much of this out, we’ll all be awaiting more detail.

Front-end troubles have plagued the commissioning cycles of several cellulosic biorefineries — though they are not only making sugars but fermenting them into ethanol. So, these questions —although doubtless well advanced in terms of answers — are relevant and pertinent.

We expect that some of them may be answered as soon as the first week of June, when Comet Biorefining chairman Andrew Richard addresses ABLC Feedstocks 2016. Additionally, Sandy Marshall, board chairman of Bioindustrial Innovation Canada, will make an address.

Marshall will be presenting on two studies. The first: setting up the corn stover value chain from the farm to the mill for the Comet project in Sarnia. Cost, quality, storing, delivery, and more. The second: on establishing a farm Coop, the Cellulosic Sugar Producers Co-op. Sandy worked closely with the BIC team on completing these studies and has been involved in numerous farmer meetings as well.

Reaction from the principals

Andrew Richard, Chairman and Founder of Comet Biorefining, said, “Having off-take agreements in place with bioeconomy leaders like BioAmber demonstrates the market’s confidence in our technology and products. As a trusted feedstock partner, Comet is helping to build a successful bioeconomy hub in Sarnia, Ontario, close to plentiful biomass. We are extremely pleased to welcome Jean-Francois Huc as a member of our board.”

Jean-Francois Huc, BioAmber CEO commented, “We have tested many second generation sugars and Comet offers dextrose that is on par with dextrose from corn, both in terms of quality and price. Comet has proven this by operating a large demonstration plant in Italy, setting them apart from others. Comet has also put together a unique value chain in Southwestern Ontario, bringing together farmers, technology, off-takers and government. We are looking forward to participating in their exciting growth prospects.”

The Comet backstory

Cellulosic Sugar Producers Cooperative collaborating with Comet Biorefining to develop agricultural biomass supply chain

Comet to build 30K ton biomass sugar plant in Ontario

Comet Biorefining hires Rich Troyer, formerly of Coskata, as CEO

The BioAmber backstory

Mitsui invests $25M in BioAmber JV; raises stake, will “play a stronger role”

Renewable chemicals, disruptive cost: The Digest’s 2016 8-Slide Guide to BioAmber

BioAmber: Biofuels Digest’s 2015 5-Minute Guide

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.

April 19, 2016

Three Water Recycling Stocks

by Debra Fiakas CFA

The water series continues as we attempt to get arms around the very large market to package, deliver, purify, treat, and recycle water.  As the need for water increases with population and economic activity, the use of waste waters has become an imperative.  In this post we look at three companies helping to clean up, reclaim and otherwise recycle waste water.

Ecosphere Technologies, Inc. (ESPH:  PK) has introduced several water solutions that can be used in agriculture, mining, industry, or municipal applications.  The company’s flagship Ozonix Technology is a chemical-free system to recycle waste waters.  Instead, the system saturates the water ozone using hydrodynamic and acoustic cavitation and then destroys the cell walls of harmful micro-organism with electrochemical oxidation.  Even highly reactive bacteria can be wiped out through this process.

The Ozonix mobile system can be wheeled into even remote locations such as mines or oil and gas well sites.  The company recently signed an exclusive licensing agreement with a distribution partner in the mining industry.  Abandoned Mine Cleanup LLC has agreed to pay an upfront licensing fee of $5 million for exclusive access to the Ozonix system for mining market in North and South America.  Ecosphere will also earn royalties on future sales and the licensee has guaranteed a minimum of two sales.

The company is late in filing its financial report for the year ending December 2015, notifying the SEC at the end of March 2016 that a discrepancy with its auditors related to “certain payment issues” has delayed the completion of the annual audit.   In the late notice, the company provided preliminary financial results with sales totaling $736,874 and an operating loss of $4.9 million.  In light of the protracted downturn in the oil and gas industry, which has been Ecosphere’s primary addressable market, its auditors have recommended a write-off of $11.9 million in intangible assets.  That will bring the net loss for the year 2015 to an estimated $22.6 million.  The late notice filing provided no balance sheet or cash flow details.  At the end of September 2015, the company held $4,822 in cash on its balance sheet and had a negative working capital profile.

With the troubled financial profile it should be no surprise that the Company trades at nickel per share.  The recent licensing agreement appears to be coming at a critical point for Ecosphere.  The share price thus represents an option on this payment and the ability of management to use the cash flow as a springboard to market penetration.

Industry is not the only place to find foul water.  Excess nutrients in water runoff from fields have led to algal blooms deadly to fish and livestock waste has contaminated downstream water sources.   Bion Environmental (BNET:  OTC) has patented a biological process that facilitates the growth of naturally-occurring bacteria that converts most the nitrogen in waste streams to harmless inert gas.  The rest of the nitrogen and phosphorus is converted to a cellulosic biomass that is later recovered from the water stream.  When put to work, Bion’s process removes up to 95% of the excess nutrients from agricultural waste streams and reduces 90% or more of greenhouse gas emissions.   The clean water can be reused at the farm for animals or crops or allowed to return to ground water reservoirs.  The cellulosic solids can be repurposed for energy production.  The company has also patented technology to recover nitrogen-rich fertilizer from livestock waste streams.

Under provisions of the Clean Water Act of 1972, the U.S. Environmental Protection Agency is responsible for regulating animal waste.     The 1998 Clean Water Action Plan identified a strategy for addressing pollution from animal feeding operations.  Dairies in particular are prone to releasing untreated wastewater into neighboring environments since they use large amounts of water to remove manure from milking barns and corrals.  Stricter regulatory action is likely needed to get livestock owners the incentive to invest in water clean-up technology.

As promising as the story sounds, Bion has had trouble penetrating the U.S. agricultural market.  Sales have yet to reach even the $100,000 hurdle.  Management appears to be moving forward with a bare bones budget, using $1.0 million in cash to support operations in the twelve months ending December 2015.  The company only had $185,560 in the bank at that time, suggesting a critical need to find paying customers.  At $0.84 per share, the stock appears to be a rather expensive play on management’s ability to get livestock owners to adopt its system.

If these two companies leave you wheezing and coughing, France’s water industry giant Veolia Environment P.A. (VIE:  PA or VEOEY:  OTC) may provide an ‘emergency inhaler.’  Water treatment and clean-up solutions are only parts of a wide menu of environmental products and services offered by the Veolia.  A recent contract win from Petrofac, a British oil and gas producer, is typical of Veolia’s water clean-up business.  Veolia will provide treatment systems for wastewater generated at the Rabab Harweel oil and gas project in the Sultanate of Oman.  Veolia is already familiar with Oman, having completed the expansion of the Sur desalination plant near Muscat, Oman.

Veolia reported $25 billion in sales in the fiscal year ending December 2015, providing $450 million in net income or $0.69 per share.  Operations generated $2.4 billion in operating cash flow.  The company ended the year 2015 with $4.6 billion in cash on the balance sheet.  Even at the very low interest rates now offered by banks, Veolia’s cash balances would produce enough interest income to provide working capital for both Ecosphere and Bion.   Veolia might be conserving its cash for to support its debt burden.  Veolia carries enough debt to propel its debt-to-equity ratio to 130.0.

To get a taste of Veolia investors must pony up a price 30.4 times trailing earnings, suggesting that a position in a large, well established operation comes with a price.  One plus is that the shares come with a 3.4% current dividend yield.  Another plus is low volatility.  Shares quoted on the U.S. Over the Counter listing have a beta of 0.90.

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.

April 18, 2016

Water Gleaner Stocks: Value In Sludge

by Debra Fiakas CFA

There are well over 3,000 companies around the world that are involved in some element of wastewater treatment, providing a broad mix of technology, equipment or engineering services to generators and collectors of fouled water.  A small group in this wide field is gaining visibility  -  the ‘water gleaners.’  Like the peasant women picking up stray grains of wheat left behind in the empty field of Millets famous painting, some see value in effluents, sewage and run-off.  In this post we look at three small-companies with novel technologies to harvest water.

New Sky Energy is a private company based in Boulder, Colorado, has developed several waste recycling processes, including carbon dioxide capture, sour natural gas sweetening.  The company’s ‘SaltCycle’ process converts industrial and agricultural brines into useful chemicals that have economic value.  It is an appealing alternative to having to pay for disposal.

The SaltCycle process involves two steps.  In the first step brines are concentrated and purified to produce useful salts such as sodium chloride or sodium sulfate.  Then in step two, the salts are put into a chemical or electrochemical reactor to produce acid, base and sulfate.  Soda ash or bicarbonate can be produced from the base.  Sales of the end products can be used to pay for upstream water treatment or as a power source for the SaltCycle reactor.

 New Sky has focused on the water waste streams of the oil and gas industry.  However, the company has also been calling on mining companies, landfill operations, agriculture, and other manufacturers.  One element that helps the New Sky pitch is the scalability of its systems and the availability of engineering services to help optimize operations. Patents protect the technology behind its three primary waste converting systems.

With all that going for New Sky Energy, there is little for investors.  Management holds its cards fairly close to the corporate vest, making only a few customer announcements and saying little about partners or investors.  Still New Sky Energy is an interesting company to watch for future developments in this expanding market for sustainable industrial processes.

MagneGas Corporaton (MNGA:  Nasdaq) has been a topic of past articles.  The November 2015 post outlined how the company is using its plasma arc technology to gasify carbon-rich liquids such as municipal wastewater to produce hydrogen gas.  The company markets the gas for industrial applications such as metal cutting.  It widely seen as a replacement for acetylene and has been adopted by fire departments emergency situations requiring safer metal cutting tools.  MagneGas2 is being used by two subcontractors in the expansion of the Vehicle Assembly Building at NASA’s Kennedy Space Center.    Most recently the company received an order from a major gas company in Mexico for industrial metal cutting.

As a public company MagneGas provides investors a pure play on wastewater reclamation and reuse.  Unfortunately, ‘industrial sustainability’ is also a ‘small play.’  In the twelve months ending December 2015, the company reported $2.3 million in total sales, resulting in a net loss of $8.8 million.  MagneGas is also still using cash resources to support operations  -  $5.6 million in that same twelve-month period.  With only $2.2 million in cash remaining in the bank at the end of December 2015, a ramp in sales cannot come fast enough for MagneGas.

OriginClear (OOIL:  OTC) was the focus of an October 2015 post.  The company has developed an ‘electro water separation’ process that uses electricity to collect oil and suspended solids in waste water.  The solids are removed with ‘advanced oxidation’ to return clean, decontaminated water back to the industrial system.  OriginClear markets its system has application in settings where oil contaminates water such as in hydraulic fracturing of oil and gas wells.  However, it also has application in the production of algae for fish feed.  Both industries are large water users and benefit from being able to recycle and reuse water rather than having to pay for both water replenishment and wastewater disposal.

Through the acquisition of Progressive Water Treatment based in Dallas, Texas, OriginClear took its first step in the reclamation of foul water.  Progressive brought with it a portfolio of water treatment systems for municipal and industrial waters using reverse osmosis technologies.  More recently the company launched a joint venture with a Malaysian engineering firm, Osmocell Malaysia, which has successfully deployed twenty filtration and reverse osmosis systems for water purification.  The joint venture claims over $1.0 million in proposals and bids in its business pipeline.  Malaysia is the world center for rubber glove manufacturing, which uses water-intensive processes that leave organics and ammonia in process water. 

OriginClear has yet to record significant revenue and still requires cash resources to support operations.  Consequently, its stock is priced in the pennies as an option on management’s ability to conserve cash resources long enough to get the revenue pump primed and generating higher numbers at the top-line.  Cash totaled $695,295 at the end of December 2015.  With a cash usage rate near $250,000 per month, there is some concern about how long OriginClear can last without a dramatic increase in revenue.  That said, the company did have $1.0 million in contracts receivable on the balance sheet, so collections could save the day.  Furthermore, the Progressive Water Treatment operation acquired in October 2015, is expect to add $6.5 million to the top-line in 2016.  

Management of OriginClear is also actively in the hunt for additional acquisition and joint venture partners.  While we expect that large group of over 3,000 companies to consolidate, it is tough to see OriginClear, with it barebones balance sheet, as a consolidator.

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.

April 17, 2016

A Buying Opportunity for Alternative Energy Mutual Funds and ETFs?

By Harris Roen

Alternative Energy Mutual Funds Trade Down for the Year

Alternative energy mutual funds have taken a hit, down 6.5% on average over the past 12 months. Just three of the 15 mutual funds we track are up for the year. The largest gainer, Brown Advisory Sustainable Growth Inv (BIAWX), is only up an anemic 6.2%.

Much of the difficulty is due to a drop in solar stocks over the past 12 months. For example, if you look at the top weighted holdings of Guinness Atkinson Alternative Energy (GAAEX), nine out of 15 are solar stocks. All of those solar stocks are down for the year, off an average of 22%.

  mf returns

ETFs are Widely Lower

Alternative energy ETFs have suffered what can only be called stunning declines in the past 12 months. Of the 22 ETFs that we track (that have been trading more than a year), 19 are trending down. Two of the bottom three performers are solar ETFs. Alternative energy ETFs have fared better in the past quarter, with slightly more than half of ETFs trading in positive territory…

ETF returns


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.

April 16, 2016

Yingli's Hopes For Government Rescue

Doug Young

Bottom line: Yingli looks set to receive a government bailout from Beijing.

Beijing is telling one of the nation’s biggest policy lenders to provide money for struggling solar panel maker Yingli (NYSE: YGE) before it defaults on a bond payment due next month.

Last week Yingli said it was in desperate negotiations with 2 groups of creditors, including one holding 1.4 billion yuan ($220 million) worth of bonds set to mature next month. (previous post) The other group is owed another 1 billion yuan related to an Yingli bond that came due last year, meaning Yingli needs to find a total 2.4 billion yuan in new money before next month to avoid a massive default.

I previously said the wording in Yingli’s statement implied it was negotiating for a broader government rescue, and now the latest media report from Reuters is saying such a rescue loan could be coming soon. The report says China’s banking regulator has asked China Development Bank to guarantee 7.5 billion yuan in loans to Yingli to pay off debts and engineer a broader company reorganization. (English article)

Such a sum does look like enough to pay off all of the short-term creditors and also conduct a major overhaul of the company, which is currently losing massive money. While that might look good for Yingli, it looks far less positive for China Development Bank, which could easily lose billions of yuan if Yingli ultimately fails to repay this big new loan. But then again, Yingli’s rise was largely fueled by government subsidies, so now it’s not that surprising to see the government stepping in to prop up the company one more time.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.. 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.

April 15, 2016

Some BYD Buyers Wanted Subsides, Not Electric Vehicles

Doug Young

Bottom line: A new report spotlighting suspicious sales by BYD shows that last year’s EV explosion in China was fueled by people seeking to pocket government subsidies.

A story from China’s new energy (electric) vehicle space is shining a spotlight on the challenges companies are facing after becoming too reliant on government support. It is a twisted tale involving electric car maker BYD (HKEx: 1211, OTC:BYDDF), and shows how its boom in sales last year may have been largely due to big government rebates for buyers.

BYD experienced a rocky road over the last few years as its dream of a future filled with new energy vehicles failed to take off. That seemed to change last year, as new energy vehicle sales suddenly exploded at the company backed by billionaire investor Warren Buffett. BYD and industry boosters said the sales explosion showed that Beijing’s years of support for the sector was finally bearing fruit.

But lately a much darker story has emerged, showing that much of the explosion was fueled by opportunists simply looking to pocket some of the big government rebates being offered to new energy car buyers. Now a new report from the respected Caixin is spotlighting one such case involving 3,000 electric cars that were purchased between 2013 and 2014 to become taxis in the city of Nanjing. (Chinese article)

I’ll admit I’ve read the story several times and am still not sure what exactly happened in this convoluted tale. But the bottom line seems to be that many of these cars never got put into use, and some 240 remain in BYD’s Shenzhen warehouses to this day even tough they were ready for delivery back in 2014.

The case seems to center on a BYD dealer who later killed himself and left behind a note that detailed a large amount of unpaid bills related to the Nanjing order. BYD last month said that it was owed 30 million yuan ($50 million) related to the case, which obviously isn’t huge and won’t have a huge impact on the company. But the case hints at the kinds of fake buying that were taking place more broadly to get the government subsidies. That kind of fraud has prompted Beijing and local governments to sharply reduce or even eliminate many of those incentives this year.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.. 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.

April 14, 2016

Water Treatment Stocks

by Debra Fiakas CFA

In a game of word association many investors might respond Veolia Environmental SA (VIE:  P or VEOEY:  OTC/PK) at the mention ‘water reclamation.’  General Electric (GE:  NYSE) and Siemens (SIE:  DE or SIEGY: OTC/PK) might be next choices.  These three companies have been ‘go to’ sources for water treatment by municipalities and industry.

Indeed, it may take a behemoth to address water issues.  In January 2015, the World Economic Forum declared water as the number one crisis impacting the world, recognizing the dire circumstances of water supplies.  Over 660 million people  -  one in ten people  -  around the world do not have access to safe water for drinking, cooking and bathing.  For some it is a matter of inadequate water supplies and for others economics prevent them from accessing quality water sources.

Some might be confused by this circumstance given the wide expanse of world waterways.  Unfortunately, 97.5% of the planet’s water is saltwater and another 1.75% is trapped in ice.  Only the remaining 0.75% is available for drinking water, coming from a mix of underground wells, rivers and lakes.  The amount of water supplies will not change, but we are expected to see an increase in fresh water demand by as much as 40% by the year 2030 as developing countries seek to improve quality of life for its citizens and new industrial and commercial processes rely on water.

The inadequacy of good quality, affordable waters supplies renders precious every water droplet, shedding light on why water treatment is big business and not just business for a few big companies.  The best water is called ‘potable water’, which historically has been provided through natural sources.  Sometimes even Mother Nature falls short of goal, leaving impurities in drinking water supplies or nature is simply overwhelmed by man-made pollution and misuse.  The need to treat water has given rise to a large market for separation, filtration and treatment solutions.

Pentair Plc. (PNR:  NYSE) is a growing player in the water treatment industry.  Unlike the big companies named in the opening paragraph of this article, Pentair is exclusively focused on water.  With corporate headquarters in the United Kingdom, Pentair keeps its primary business office in the U.S.  Among a mix of other water-related products, Pentair offers ultra-filtration and nano-filtration solutions to purify liquids.  Its products are used by water system owners, industry and homeowners.

In the fiscal year ending December 31, 2015, Pentair reported $6.5 billion in total sales and a net loss of $65 million or $0.42 per share.  Excluding a non-recurring charge of $554 million related to the write-off of intangible assets, operating income for continuing operations was $2.63 per share.  Operations generated $739.3 million in cash flow in the year, leaving $126.3 million in the bank at the end of December 2015, after investments and pay-down of debt.  Pentair has relatively leveraged with a debt-to-equity ratio of 117.49.  Management seems to have no trouble in juggling cash and debt, devoting some operating cash flows to a regular dividend.  Current yield is around 2.5%.

A true small-cap play on water treatment can be found in Calgon Carbon (CCC:  NYSE), a supplier of a broad mix of filtration and purification solutions for fluid and gas streams.   The company is probably best known for its activated carbon materials, which are widely used by water system owners to filter out contaminants.  Calgon also offers ultraviolet irradiation and ion exchange technologies for waster systems.  The company recently opened a new plant in the U.K. for the reactivation of spent carbon used in drinking water applications.  Capacity at the plant has been increased to 10,000 tons per year from 5,800, providing some insight into the promise Calgon sees in the water market for its carbon products.

Calgon also offers a dividend, but its yield of 1.4% is not as appealing as that of Pentair.  However, Calgon shares are trading at an interesting 12.9 times forward earnings, making it a relative bargain given the projected earnings growth of 19% in 2016.

Calgon reported $535 million in total sales for its water quality solutions, providing $43.5 million in net income.  That represents a net income margin of 8.1%.   The conversation of sales to operating cash was an even more impressive 13.1%.  The company is a consistent generator operating cash flow, which is probably why the company has a relatively low leverage position.  The debt-to-equity ratio is 28.3 for Calgon compared to a 90.6 ratio for the greater pollution control and treatment industry.

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.

April 13, 2016

Water Quality Stocks

by Debra Fiakas CFA

Pipes, pumps and values are only part of the drinking water story we began telling last week.  The Ecological Society of America estimates that the U.S. spends more than $2 billion annually on clean water projects in an attempt to prevent pollution and clean contaminated water.  Water quality is a diverse market, beginning with projects to promote natural ecosystems which are the ultimate ‘water filter.’  The market extends to water treatment facilities, filtration systems and purification technologies among other solutions to ensure that our drinking water is safe.

The market for water quality solutions is highly fragmented with numerous small operators, often with some engineering or technological expertise, addressing the peculiar water issues in their immediate locale.  Few companies have gains national or international scale, save for those large engineering firms that have broad interests in a variety of civil engineering projects.  Most of the players are private, leaving few options for investors to take a ‘pure play’ position in water quality.  Nonetheless, we found one private player that offers some interesting water quality solutions.  Two more public companies provide good plays on water.

Headquartered in Pennsylvania, Evoqua Water Technologies has built a network of 170 sales offices and production facilities in eight countries. Evoqua sells a mix of water and waste water treatment products such as activated carbon and sludge thickener or disintegration products.   The company also sells a broad selection of systems for biological treatment of water, waste water handling, aeration and anaerobic digestion, among other equipment and components.  Engineering and project integration services to commission, maintain and optimize water and waste water facilities.  Besides catering to the municipal drinking water and waste water market, the company also serves various industry verticals such as aquatics, food and beverage, pharmaceuticals and chemicals processing, among others. 

Recently, Evoqua won contracts to build four wastewater treatment plants that will expand the capacity of three different communities and one private agricultural company.  The company’s Davco-branded field-erected treatment solution will be installed in each site for expansion of existing facilities.

Unfortunately, there is no public data available on the company’s financial performance or market share.  That said we believe it is highly likely that the company is profitable and has been successful enough to generate strong cash flows that have funded the company’s expansion beyond its home market in the U.S.  With its brand presence on several continents, we expect Evoqua to eventually end up on someone’s radar, either for a move to the public capital market or as an acquisition target.

Xylem, Inc. (XYL:  NYSE) does provide a publicly traded stock for investors interested in the water market.  In the most recently reported twelve months ending December 2015, Xylem reported $3.65 billion in revenue from the sales of water infrastructure and equipment, providing $340 million in net income.  That represents a net profit margin of 9.3%.  The conversion of 12.7% of sales to operating cash flow is even more impressive.

The company got its start with an innovative submersible wastewater pump, parlaying that leading edge technology into a broad range of water and waste water systems and components.  Among the menu of products Xylem sells, is a selection of treatment systems and analytical instruments that address water contamination issues.  Xylem provides filtration, biological treatment and desalination solutions.  The company has systems or products in use in over 150 different countries.

Xylem is no small-cap.  It has earned a market capitalization of $7.4 billion or 2.0 times sales.  That may seem pricey, but we note that the stock is trading at 18.8 times projected earnings of $2.00 in earnings per share in 2016.  A forward dividend yield of 1.7% helps sweeten the pot.  Forward price multiples in the water and waste water industry also suggest Xylem is priced a bit dear.  The sector is commanding valuations only 11.8 times 2016 earnings estimates.

A significant competitor for Xylem is Danaher Corporaton (DHR:  NYSE), which is an even bigger company with products and services well beyond the water market.  Danaher describes its business as a science and technology operation.  In a few words its product line falls under test instruments, environmental products and services and life sciences products.  Danaher can measure the quality of the water at your tap so you can brush your teeth with confidence.  They can also provide products to fix your teeth.  That wide array of products earned Danaher $20.6 billion in revenue in the year 2015.

Danaher is on the calendar to report financial results for the March 2016 quarter on April 21st.  Analysts are expecting Danaher to report a buck in net earnings per share.  Given that the company has met or exceeded the consensus estimate in each of the last four quarters, that $1.00 EPS figure seems like a safe bet.  

Likewise Danaher is trading at a healthy 17.9 times the full year 2016 EPS estimate of $4.88 per share.  A forward dividend yield of 0.7% helps make the case for DHR.

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.

April 12, 2016

Mueller: Solid Profits In Liquid Infrastructure

by Debra Fiakas CFA

The dire condition of drinking water systems in the U.S. has been made glaringly apparent with the recent debacle in Flint, Michigan that has left numerous citizens in the community suffering from chronic health conditions as a result of contaminated water.  We had no further than our own coverage group to find a company that could help solve problems the drinking water system.  Mueller Water Products (MWA:  NYSE) is a supplier of water meters, pipe fittings, valves, pipe repair components, and fire hydrants.  Mueller’s Echologics leak detection solution gives water utilities details on water infrastructure operation would seem to make Mueller a go-to resource for water system owners, since early leak detection could save millions in wasted capital spending.

In the last post we looked at data from the American Society of Civil Engineers (ASCE) and the U.S. Environmental Protection Agency that reveal the high cost of replacing and improving the drinking water infrastructure.  Even at the current sluggish pace of water system repair of about 5,000 miles per year, the repair portion of the U.S. water infrastructure market value is near $5 billion.  The Freedonia Group reports that world demand for water infrastructure equipment for both repair and expansion is expected to increase 6.5% to $101.7 billion in 2016.  The growth is boosted in part by expansion of water supply lines in developing countries.  Demand in developed countries is primarily for repair and upgrade of existing pipes and connections.

Mueller Water Products
No matter how it is measured water infrastructure is a large market with numerous competitors offering, in many product categories, highly commoditized components.  Strong brand recognition and a well entrenched sales network have helped Mueller win and retain market share.  The company goes head to head with the likes of Tyco International (TYC:  NSYE) with its well-developed fire and water division.  While both McWane, Inc. and American Cast Iron Pipe Company are private companies and provide limited financial information to the public, it is clear that both are significant players in the business of pipes and values.  McWane revealed sales of $1.7 billion in 2014, and American is through to be near $500 million in annual sales.

Mueller reported $1.15 billion in total sales in the twelve months ending December 2015, representing a top-line decrease of 1.7%.  The total sales performance figure is somewhat misleading in as much as Mueller sells its pipe components and values into the oil and gas industry as well as to water system owners.  With the price of crude oil and the entire petrochemical chain at record low prices, shipments to oil and gas customers have been down.  However, sales of the couplings, valves and hydrants used in the domestic water systems have been robust.  In the most recent financial report for the quarter ending December 2015, Mueller management reported 9.2% year-over-year growth in the domestic water segment.

In deciding whether MWA is to be your play in the water infrastructure market, sales is only one element.  In a highly competitive market, a profitable operating structure can deliver strong earnings even if sales growth remains sluggish.  Mueller delivered $57.3 million in net income on $1.15 million in total sales in the last reported twelve months ending December 2015.  Reported net income represented a net profit margin of 4.9% compared to 4.7% in the year-end fiscal year ending September 2014.  Thus while Mueller has struggled to keep its top-line up in the wake of lost business with its oil and gas customers, a lean operating structure has helped drive more profits to the bottom line.

The cash flow from operations echoes the Mueller profit story.  In the most recently reported twelve months ending December 2015, 10.2% of sales were converted to operating cash flow.  This compares to an average of 10.1% in the previous three fiscal years.  The strong cash generation has enabled investments, debt reduction, as well as a consistent dividend payment.

Crystal Equity Research has a buy rating on MWA because we like companies that move quickly and decisively to protect profits even when sales growth is challenged.  Mueller management has defended its share in the water infrastructure market and even more zealously guarded its profits.

Investors have only been willing to pay 16.8 times projected earnings for MWA in recent trading, which is slightly above the anticipated five-year earnings growth  rate (12.5%) for the company plus dividend yield (0.84%) that total 13.3.  Mueller has few direct peers for sake of comparison.  For perspective the broader industrial equipment and components market of which the company is a part, trades at 15.5 times forward earnings multiple.  Interestingly, the utilities sector, which includes the public water system owners that bear the risk of dated and deadly water infrastructure, is trading at a higher 17.3 times forward earnings.

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.

April 10, 2016

Comparing Community Solar Subscriptions And Yieldcos

By Tom Konrad, Ph.D. CFA

Community solar is gaining traction in many states. The concept, also known as shared solar or solar gardens, originated in the mid-2000s as a way to allow broader participation in the ownership of solar photovoltaic (PV) systems, while also encouraging local development.

Community solar broadens access to solar beyond homeowners with suitable roofs. National Renewable Energy Laboratory report from 2015 estimated that 49 percent of households cannot own solar because they do not own their own home, or they live in high-rise buildings with insufficient roof space.  Rooftop solar is impractical for many more because of shading, homeowners’ association rules, or aesthetic concerns.

But now there's another way to invest in solar projects in the public market: YieldCos.

Which is a better investment for homeowners looking to support the build-out of new clean energy projects?

Financial benefits of community solar

Like residential solar, the financial benefits of community solar subscriptions have been improving over time as the price of solar equipment falls and electricity prices have mostly risen.  

I interviewed Tom Sweeney, chief strategic markets officer at community solar developer Clean Energy Collective (CEC), to gauge the current and future marketplace. CEC has developed many community solar farms in its native Colorado, as well as Massachusetts, Rhode Island, Wisconsin, Washington and Kansas. The company is also developing community solar projects in New York, which recently passed enabling legislation.

Sweeney says that CEC’s typical subscribers are educated baby boomers who are motivated both by financial benefits and by a desire to promote renewable energy. But, like residential solar installations, improving economics are likely to draw in a rising number of shareholders motivated purely by financial benefits.

Over the past few years, solar installers have moved from needing an upfront payment to offering solar leases and loans that allow the homeowner to begin saving money immediately. In Massachusetts, a combination of high electricity prices and robust incentives allow CEC to offer a pay-as-you-go (PAYG) model requiring no upfront payment. The subscribers pay only for the credits to their bills, at a cost of 85 percent to 90 percent the value of the credits. The company plans to offer similar subscriptions to its first projects in New York, as well as to introduce the PAYG model in Colorado.  

The low risk and immediate financial benefits of the PAYG model are likely to broaden the market for community solar subscriptions, just as first-year savings have broadened the market for residential rooftop solar beyond environmentalists and early adopters.

YieldCos as an alternative to community solar?

As the motivation to buy community solar subscriptions becomes increasingly financial, it makes sense to start comparing them to a purely financial investment, such as renewable energy YieldCos. YieldCos are publicly traded companies that own clean energy assets and use the income to pay dividends to shareholders.

Many community solar subscribers (Including Ms. Ostrom) consider comparing a stock market investment to a solar subscription to be "apples and oranges."  The main grounds for these objections seem to be the assumptions that:

  1. Community solar is not an investment in the same sense as Yieldcos are.
  2. Buying a Yieldco on the secondary market does not help build new solar farms
  3. Community solar is a hedge against rising electricity prices in a way that Yieldcos are not.

Taking each of these in turn, it is true that community solar subscriptions are not an investment according to the IRS or Securities Exchange Commission (SEC.)  Community solar has exemptions from the rules governing investment so long as the subscriptions only offset electric bills, and they are not being held with the intent to resell at a profit.  On the other hand, the Supreme Court has defined an investment as a contract  "whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”  Except for the "expectation of profits" this sounds exactly like a solar subscription, and, even there, offsetting an electric bill seems very similar.  I can imagine a person buying a Yieldco, and using the dividend checks solely for paying her electric bill.  In short, the main difference between a solar subsription and a Yieldco is that a Yieldco investment is more flexible in terms of what the dividend can be used for.

On the other hand, buying a Yieldco on the secondary market (as opposed to during a primary or secondary offering direct from the company) does help new solar or wind farms get built.  Currently, most Yieldco prices are very low.  In fact, they are so low that few Yieldcos can issue new shares to invest in new facilities without reducing the dividend to existing investors.  Yieldcos have in fact stopped issuing new shares and buying solar and wind farms.  Buy buying Yieldco shares, investors help to increase the share prices, and will eventually raise them to the point where the Yieldcos can again issue shares in a secondary offering and invest in new wind and solar farms again. 

This connection may seem tenuous, but the connection between a solar subscription and building a particular solar farm is tenuous as well.  If the subscription is purchased after the farm is built, it clearly was not essential to the construction of that solar farm.  If the subscription was purchased earlier, it still may not have been essential: Most solar subscriptions sell out quickly, and another subscriber would have been found to buy the subscription in any case.

While community solar subscriptions are a much better hedge against rising electricity local prices than Yieldco dividends, Yieldco dividends also have value as a hedge.  Long term increases in electricity prices will make it easier for Yieldcos to renew their power purchase agreements on favorable terms, making Yieldcos more valuable over time.  Falling electricity prices would hurt both community solar subscribers and Yieldco investors as well.  Hence, while a Yieldco investment is not as good at hedging a particular electricity bill, it is still a hedge, and it makes sense to compare the two. 

It's also worth noting that Pay As You Go solar subscriptions have little hedging value against electricity prices, since the cost of the solar subscription will increase or decrease along with those prices.

Reasons To Invest

Many YieldCos invest in both clean energy and conventional generation, but a few have only clean energy investments. 8point3 Energy Partners (CAFD), TerraForm Power (TERP), and TerraForm Global (GLBL) all invest almost entirely in solar. Pattern Energy Group (PEGI) is almost entirely invested in wind, Brookfield Renewable Energy Partners (BEP) is mostly invested in hydropower, with some wind and solar, while Hannon Armstrong Sustainable Infrastructure (HASI) invests in a broad range of efficiency, wind and solar investments. I will focus on these six for the most accurate comparison.

For a fair comparison to community solar, I asked two community solar subscribers -- homeowner Jacquie Ostrom and renewable energy expert Joe McCabe -- why they made the leap. Below are their reasons, in the rough order of importance they assigned to each:

  • Fighting climate change
  • Supporting renewable energy
  • Supporting innovative local companies
  • Financial returns
  • Supporting local jobs
  • Helping to educate the local utility about the benefits of solar
  • More complicated to sell a house with solar on it

Since a YieldCo's assets are almost never local, they cannot compete with community solar on the basis of supporting local companies and jobs. But they have a number of advantages over community solar subscriptions.  

Anyone can buy shares in a YieldCo. So far, only 14 states and the District of Columbia have adopted legislation enabling community solar. YieldCos also do not sell out (as community solar almost always does), and they can even be held in a tax-preferred retirement account such as an IRA.  

Investors also have a broad range of YieldCos to choose from that support a variety of clean energy technologies with different risk and reward profiles. Many potential community solar subscribers (including McCabe) have been waiting for years for the opportunity to subscribe to just one.

Let's look at a few of the reasons that Ostrom and McCabe gave for investing in community solar and then compare them to YieldCos.

Fighting climate change

Investments in different clean energy technologies can have wildly different climate impacts, and solar is seldom the most effective. In fact, the most important factor in determining the climate impact of a solar farm is the carbon intensity of the electricity it displaces.  While community solar farms and wind farms in the coal dependent Midwest are very effective at reducing greenhouse gas (GHG) emissions, community solar farms in California are much less effective at reducing GHGs, since California's grid is already very clean.

The other question to ask is how much electricity generation an investment in a solar subscription of Yieldco creates.  According to its annual report, Pattern Energy sold 5.1 million MWh in 2015, or about 1.6 MWh for every $1000 invested in the company.  A typical solar farm at $2/W after incentives would produce between a third and a half as much electricity per dollar invested.  Hence, unless the community solar installation feeds power to a very carbon-intensive utility, investing in Pattern seems like a much more effective way to fight climate change than a similar investment in a community solar farm.

Supporting renewable energy

An investment in any of the YieldCos listed above is as much an investment in clean energy (when including energy efficiency) as a community solar subscription. If we drop energy efficiency from consideration, that still leaves five viable YieldCos.

Ease of transactions

According to Sweeney, CEC’s subscribers have never had problems selling their subscriptions. Community solar projects are mostly sold out, and CEC has been able to find a buyer at the price the seller wanted the 20 or so times the company has been asked to step in. That said, selling community solar subscriptions is not as easy as selling YieldCo stock, where buyers are available whenever the market is open.

Financial returns

While YieldCos cannot offer anything like the reliable and safe returns of a PAYG community solar subscription, the size of those returns is limited by a subscriber’s electric bill. If, for example, a subscriber pays CEC $0.90 for every dollar of bill credit, and her monthly electric bill is $100, then the savings will be no more than $120 per year.

According to Sweeney, CEC’s solar subscriptions in Colorado that had upfront payments have typically repaid 5 percent to 8 percent of the subscription cost in the first year. This number rises and falls with the price of electricity. The comparable number will be 6 percent to 9 percent in New York.

This number is roughly comparable to the dividend yield for YieldCos. At the end of February, the YieldCos listed above offered the following dividend yields at the market close on April 1st:

5.9% 6.3%

In general, current YieldCo dividends are in the same range as returns from solar subscriptions. The dividend yields from 8point3 (CAFD), Pattern (PEGI), Brookfield (BEP), and Hannon Armstrong (HASI) all fall neatly into the 6 percent to 9 percent range that CEC expects to offer subscribers in New York.

The much higher yields at TerraForm Power (TERP) and TerraForm Global (GLBL) reflect uncertainty around the bankruptcy of their sponsor and controlling shareholder, SunEdison (SUNE).  This puts the two YieldCos' dividends in danger, and the much higher yields are the consequence of the greater risk.

Yieldco dividends (excluding the TerraForms) are likely to grow faster than the growth of electricity prices, making the YieldCos much more compelling at current prices than upfront investments in community solar.


YieldCos are currently much more attractive than community solar subscriptions -- particularly when it comes to financial returns, greenhouse gas reductions and ease of transactions. The exceptions are benefits to the local economy provided by community solar.

The factor that has so far prevented the widespread comparison of community solar and YieldCos is the perception of risk. After all, the reason most YieldCo yields are high enough to compare favorably to community solar is that their prices have fallen drastically since a year ago.

It is true that YieldCo prices could drop even further, although I am on record predicting that the bottom of the YieldCo market was reached in September of last year. I stick by that call. YieldCos invest in the same types of assets as community solar, and the cash flows that underlie their dividend carry the same sorts of risk.  Most community solar subscribers purchase their subscriptions with no intent to ever sell. A YieldCo investor who does the same should, on average, outperform the subscriber because of the higher current dividend and expectation of dividend growth.


While YieldCos currently seem more attractive than community solar subscriptions in many respects, they cannot match the potential of local development or the minimal risk of a PAYG subscription.

Hence, the best option would be to invest in both. Take the no-money-down PAYG subscription and save a little on your electricity bill while helping the planet and your local economy. Then, take any money you were thinking of investing in community solar and buy a YieldCo or three.  

Disclosure: Tom Konrad owns CAFD, TERP, GLBL, PEGI, BEP, and HASI.  He does not yet own a solar subscription, but he plans to subscribe as soon as one is available for his utility.

April 08, 2016

Shriveling Yingli Fends Off Bond Holders

Doug Young 

Bottom line: Yingli is likely to get sold or announce a major government-led restructuring, which could include bankruptcy, before a new round of 1.4 billion yuan in bonds comes due next month.

In what looks like a case of deja vu, fast-shrinking solar panel maker Yingli (NYSE: YGE) is in the headlines again as it looks set to default on 1.4 billion yuan ($220 million) worth of bonds set to come due next month. The default would be Yingli’s second within a year, after it failed to pay off part of another big bond that matured last October.

Yingli is still working to repay the remaining debt from that earlier bond, which amounts to another 1 billion yuan. That means that Yingli now needs to find some $375 million in funds to repay all of its maturing debt by the time the new round of 1.4 billion yuan in medium-term notes come due on May 12. That looks all but impossible for a company that’s bleeding money, which resulted in a $500 million net loss during its latest reporting quarter.

Despite the latest looming crisis, shares of YIngli, once China’s biggest solar panel maker, were only down 0.9 percent in the latest trading session in New York. But there’s not much more downward space for the company’s stock to fall, since at its current level Yingli is only worth $83 million.

Investors lack of panic at the latest looming crisis could mean several things. Most likely many serious investors have already given up on Yingli, and the only people left are simply day traders looking for big swings in the stock to make some quick profits. Some more serious investors may be waiting for another government bailout like the one that allowed Yingli to repay 70 percent of the bond that came due last October. (previous post)

One other possibility that looks increasingly likely is that Yingli’s hometown government and biggest backer, the industrial city of Baoding, may finally be tiring of bailing out this struggling company and want to merge it with a stronger rival. If that occurs, I expect the company could sell for even less than its current market value. Or Baoding could even let Yingli go bankrupt first, making its New York-traded stock worthless.

According to its latest announcement, Yingli says it held 2 meetings on March 28 with holders of its bonds set to come due on May 12, as well as holders of 30 percent of its bonds that came due last October but still remain unpaid. (company announcement; English article)

‘Very Difficult’ Debt

YIngli told holders of the notes coming due next month that it would be “very difficult” to repay the money, and proposed a 2-3 year extension on the repayment. At the other meeting, holders of the 30 percent of bonds that came due last October but have yet to be repaid demanded repayment plus interest. Yingli said it would make its best efforts to repay the money before the May 12 deadline when the new round of bonds matures.

The wording in Yingli’s statement hints that the company may be aiming to resolve all of the default issues by May 12, so perhaps everyone is sitting back and waiting to see what happens as that date nears. Frankly speaking, my sense is that the only reason Yingli continues to stay in business now is that the Baoding government doesn’t want to deal with a messy situation that might come with a bankruptcy declaration.

Yingli was once a solar superstar, but its fatal flaw was relying too heavily on low prices to gain market share without innovating very much. That strategy worked when the market was booming and prices were high, but has now saddled Yingli with huge losses due to weak pricing for its cheap solar panels. All of that said, it really does seem like the sun set on Yingli about a year or two ago, and it’s quite possible we could see a sale or major government-led restructuring announced just before next month’s May 12 deadline.

Doug Young has lived and worked in China for 20 years, much of that as a journalist, writing about publicly listed Chinese companies. He currently lives in Shanghai where, in addition to his role as editor of Young’s China Business Blog, he teaches financial journalism at Fudan University, one of China’s top journalism programs.. 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.

April 07, 2016

Nordex Issues First Green Schuldschein

by the Climate Bonds Team

German green debt instrument raises €550m ($621m) for wind energy and gains Climate Bonds Certification.

German wind company Nordex (NRDXF) is the first Schuldschein issuer to label its issue as green.

The green issue is verified under the Climate Bonds Standard and sector specific Wind Standard. Assets include wind power manufacturing and infrastructure around the world. Nordex employed DNV GL to verify the green Schuldschein against the Climate Bonds Standard.

The deal was split across four tranches with 3, 5, 7 and 10 year tenors. The joint underwriters were Unicredit, Bayerische Landesbank, BNP Paribas, Commerzbank and HSBC.

You may be wondering at this point – “but what is a Shuldschein?”

Green Schuldschein are similar to Green Bonds...

Schuldschein are privately placed debt instruments similar to bonds and loans, except investors almost always hold them to maturity. They can have either a fixed or a variable coupon (interest rate).

 …But there are differences:

  • Schuldschein loans, which traditionally originate from the German market (hence the Germanic label), are not traded in a market nor listed on a stock exchanges; that makes them more like a loan than a bond.
  • Since they are usually unrated and unlisted, hence making them cheaper to issue.
  • Because Schuldschein are not marked-to-market they avoid exposure to volatility in the bond market.
  • They’re usually – except in really bullish bond markets – priced lower than comparable bonds trading in the secondary market. In fact they’re not eligible for deposit in clearing systems and cannot be listed on stock exchanges.
    (However, it is worth noting that a Schuldschein can be traded in the private and bilateral market where there’s a buyer and willing seller.)

Because of these differences an issuer may opt for financing via a Schuldschein rather than bonds.

Who are the issuers of Schuldschein loans?

Historically, German government institutions were the main issuers of Schuldschein loans followed by financial institutions. In recent years’ German corporates have increasingly been getting in on the act followed by international issuers.

Who buys them?

Banks, insurance companies and increasingly institutional investors are the main buyers of Schuldschein.

Going green is a great step for the multibillion EUR corporate Schuldschein market

This certified green Nordex issue is the first green Schuldschein to date.

And with a total issuance of corporate Schuldschein loans of more than EUR19bn in 2015 there is plenty of potential for additional green issues in the market in the near future.

Gut Gemacht Nordex!

——— 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. 

April 06, 2016

REG: A Little ADM With Better Growth Prospects

Jim Lane

At 8:30am, there’s a standing daily meeting of the key traders in Gary Haer’s sales group at Renewable Eenergy Group's (NASD:REGI aka REG) headquarters in Ames, Iowa.

And they’re not kidding. Everyone stands. For 15 minutes there’s the rat-a-tat-tat of rumor, fact, competitors, pricing, spreads, the who’s selling what and where, the buying and selling of diesel, renewable diesel and biodiesel across North America.

On most minds this Friday morning, what’s going to happen with corn prices?

The USDA late on Thursday released its annual spring plantings report and it was a shocker. Corn acres up 5 million, wheat down 5 million. Despite high corn ending stocks from last year. Prices are sure to go low. But how low? By day’s end the price would drop 15 cents a bushel, almost 5 percent. That’s good news for REG — they’re the major buyer of inedible corn oil from ethanol producers, which they have figured out how to convert into biodiesel. But how much good news, that will only become clearer through the day.

Meanwhile, the dozens of Bloomberg TV screens and the overhead pricing screens on B100 biodiesel, fossil prices and key REG inputs such as virgin vegetable oils — they are spitting out the numbers, updating nearly every second.

The rat-a-tat-tat continues as the team talks about dealmaking in the market.

“I was up in North Dakota drumming up some business with [omitted], and they had [omitted] come in at -15.” In the parlance of the meeting, that’s15 cents below quoted market price. In a market where wholesale diesel futures are selling at $1.13 per gallon, that’s a gigantic discount. Someone is moving inventory aggressively. The team pauses, takes it in, then the rat-a-tat-tat resumes. Minnesota, California, a terminal here, a customer there.

It’s been a couple of years since we visited REG and the difference is palpable. The company has become a little ADM, rather than a big Amyris or TerraVia. You see the trading desks at the bigger ethanol operations like Green Plains — relatively massive and certainly lively trading ops. But it’s not something we’ve seen in companies like REG. It used to be a company you could safely describe as a biodiesel company, just as you could safely think about biodiesel as a market for the soybean oil byproduct of a soymeal crush.

But no more.

The old biodiesel paradigm gone by

The problem with biodiesel companies, for a long time, has been the volatility of raw material prices and energy prices.

Biodiesel has long been America’s favorite advanced biofuel, but they don’t call the spread between soybean prices and biodiesel prices “the crush spread” for nothing. You can get crushed. Favorable economic winds can turn on you lickety-split, leaving you with upside down economics (high input, low output prices) and working capital that burns faster than firecrackers on the 4th of July.

More than a decade ago, biodiesel was an answer to a problem for soybean growers. Their soymeal had been approved and successfully trialed as livestock feed, and orders were up, up, up. But after the soy was crushed to make meal, the oil piled up, and after a while there’s no place to store it, and dumping is neither eco-friendly nor economically viable. Now, you can run a diesel engine on straight veggie oil, but it’s gummy. But throw in some methanol and a sodium-based catalyst under heat and pressure, and you break the oil molecule into pure B100 biodiesel and a glycerine by-product. The technology is complex enough, but costs less than a dollar a gallon for the capex.

Then, soybean oil was trading at something like 10-11 cents a pound, or around dollar a gallon for the raw materials in a gallon of biodiesel, and energy prices were far higher. And an industry was born.

Back then, there were a lot of companies that wanted to become what REG has become today. A multi-plant, multi-feedstock, multi-product producer with operations across the US and now reaching into Europe.

Fast-forward to 2008/09, when soybean oil prices skyrocketed as high as 70 cents a pound, and the easy good times were over. Plenty of producers went idle.

REG, however, found the answer in a technology so critical that even today, on a public plant tour, they don’t like to talk about it. It’s a FFA stripper. This takes free fatty acids, which are difficult to process, out of alternative feedstocks like fish oil, choice white grease, yellow grease, brown grease, and inedible corn oil. The technology allowed REG to manage its input costs through supply diversification — and with a superior price structure, came a series of mergers and acquisitions that brough the company to 11 plants today, worldwide.

It’s not a license to print money, biodiesel. The company made $50 million last year and without the December 2015 renewable of a $1 per gallon biobased diesel tax credit, might have slid into the red with the collapse of oil prices which began in Q4 2014.

Three legs to the REG stool

1. Diversification. The company is diversifying everywhere you look. The afore-mentioned raw materials. Through the recent acquisition of LS9 (now REG Life Sciences) and Dynamic Fuels (now REG Geismar), the company has diversified on the product side.

We expect to see a first commercial product from Life Sciences in 2016/17 — a fragrance product that can be manufactured at commercial-scale at the company’s plant in Okeechobee, Florida. Perhaps as importantly, LIfe Science’s feedstock is sugar — for now, think corn sugars (dextrose), although any source of sugar is technically acceptable; it comes down to price.

We also note that Minnesota and Iowa, where REG operates, are the first states to put in renewable chemical producer’s tax incentives. Iowa’s legislation expected to be signed this week by Governor Terry Branstad.

Meanwhile, Dynamic Fuels is a going concern, although two fires since acquisition have set back the commercial schedule.

2. Flat management structure. With 600 employees, the expectation is the kind of hierarchy that begins to stifle innovation. But REG keeps it flat — 30-40 person teams at individual plants, divided into 4 shifts of 7-10 people. Around 130 at HQ, most of whom are in trading or financial operations. There are just a handful at the VP level, and decision-making is quick.

3. Good outlook for biobased. Who’s said there’s no green premium? REG’s average selling price was $2.69 in 2015 — compare that to the afore-mentioned $1.13 futures price for diesel. CEO Dan Oh told investors, “The regulatory clarity and growth trajectory EPA provided last year with a multi-year RVO will grow biomass-based diesel beyond two billion gallons by next year, and effectively already has when you consider carryover RINs.”

The rap on REG

1. Biofuels companies are not Wall Street darlings on the equity side. From our POV, we wonder at that. Her’s a company that debuted at $10 after its 2012 IPO, and is trading as of last week at $9.48 despite awful energy prices. And is making money in a down market, and building market share.

Yet, we see an astonishingly low PEG (price/earnings to growth ratio), at 0.29, that led Zacks to highlight REG last week as an undervalued stock.

2. Size matters. The company isn’t big enough yet, or diversified yet, to have convinced investors to pay attention. That’s the sub-$1 billion market cap problem, combined with REG Life Sciences and REG Geismar offering limited revenues to date — so, there’s an awful lot of dependence on biodiesel in the stock price.

So, the question for the investor is to pick a date when those concerns have been addressed, but the rest of the market hasn’t woken up yet. The first announce of a significant offtake and product development deal on the chemicals side, that’s your target. Could be something in the Q1 earnings call.

3 big news items

1. Expansion in life sciences. Last week, REG started expansion and upgrade of the laboratory at the company’s Ames, Iowa headquarters to further enhance renewable chemical related biotechnology research, development and commercialization. The lab expansion will include the installation of fermentation equipment and significant analytical capabilities. Upon completion, full-time positions will be added to focus on commercialization and integration of products to be developed by REG in South San Francisco into production and delivery platforms.

“This expansion is simply one of many examples of REG’s commitment to innovation and economic development in Iowa and in particular Ames which is a cornerstone of Iowa’s Cultivation Corridor,” said CEO Dan Oh.

2. Acquisition in biodiesel. Two weeks ago, the company completed its acquisition of Sanimax Energy’s 20 million gallon nameplate capacity biodiesel refinery located in DeForest, Wisconsin. REG paid Sanimax $11 million in cash and issued 500,000 shares of REG common stock in exchange for the biorefinery and related assets. REG may also pay Sanimax up to an additional $5 million in cash over a period of up to seven years after closing based on the volume of biodiesel produced at the plant, which is now called REG Madison. Using the same REG patented and proven high free fatty acid processing technology as REG’s Seneca, Illinois plant, REG Madison produces biodiesel from lower cost, lower carbon intensity feedstocks.

3. Building the capital stack. REG Energy Services secured a $30 million line of credit from Iowa-based Bankers Trust, the company last month, The line is a one-year credit facility, with an accordion option to expand to $40 million, subject to customary conditions. “This credit line gives REG Energy Services additional capital to expand our blended fuel offerings and add to our already expansive distribution network,” said Chad Stone, REG Chief Financial Officer. “It also frees up capital allocated to the business from other sources. We are very grateful to Bankers Trust Company for seeing the strength of this part of our business and committing these funds to allow us to further grow.”

The Digest’s Take

Over in the world of materials and products, we see a rush to divest. Consider, for example, DowDupont, which will emerge as three companies in distinct segments, out of two diversified companies. But in the agricultural space, they’re generally sellers, not buying raw materials from growers.

So, companies like REG are going the other way, diversifying. Back then, one product, heading for many. One input, oils — now oils and sugars, plus a diversified set of waste oils. Back then, one technology, transesterification. Now, a suite of them ranging from hydrotreating to fermentation.

So, we see it as a little ADM, with bigger margins and growth prospects for some time to come, well positioned. Inherently more diversified than a TerraVia (SZYM) or Amyris (AMRS) on the technology and raw materials side.

Meanwhile, we note that ADM is trading at almost exactly the same price-to-EBITDA ratio as REG, and on a price-to-revenues basis. That’s the “we’re so big and been around so long” premium that benefits diversified plays in uplifting raw materials into finished products.

So, how big is big enough where REG will get a bump based on a superior growth outlook? $1 billion market cap might just do it. Keep an eye on expansion into Europe — and, with the expansion into corn sugars, given that they’re into corn oil in a big way, keep an eye on opportunities with corn protein.

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.

April 05, 2016

Shock Rise In Corn Production A Boon To Biofuel Producers

Jim Lane

In grains, the big news has been the USDA prospective plantings report, which has corn up to 93 million acres in 2016, up 5 million over last year, and it was an unexpected gain given that stock levels of grain are high now. Big stocks plus a big planting equals even bigger ending stocks — and prices have declined substantially for corn as a result, down 15 cents per bushel on the report.

The USDA report?

Officially, here’s what USDA had to say:

Corn planted area for all purposes in 2016 is estimated at 93.6 million acres, up 6 percent from last year. If realized, this will represent the highest planted acreage in the United States since 2013, and will be the third highest planted acreage in the United States since 1944.

Soybean planted area for 2016 is estimated at 82.2 million acres, down less than 1 percent from last year. Compared with last year, planted acreage intentions are down or unchanged in 23 of the 31 estimating States.

All wheat planted area for 2016 is estimated at 49.6 million acres, down 9 percent from 2015. The 2016 winter wheat planted area, at 36.2 million acres, is down 8 percent from last year and down 1 percent from the previous estimate. Of this total, about 26.2 million acres are Hard Red Winter, 6.60 million acres are Soft Red Winter, and 3.37 million acres are White Winter. Area planted to other spring wheat for 2016 is estimated at 11.3 million acres, down 14 percent from 2015. Of this total, about 10.7 million acres are Hard Red Spring wheat. The intended Durum planted area for 2016 is estimated at 2.00 million acres, up 3 percent from the previous year.

All cotton planted area for 2016 is estimated at 9.56 million acres, 11 percent above last year. Upland area is estimated at 9.35 million acres, up 11 percent from 2015. American Pima area is estimated at 215,000 acres, up 36 percent from 2015.

The impact

It’s good news for ethanol producers, however, who are seeing gasoline prices recover slightly and raw input prices in corn continuing to decline. That also means good news for biodiesel producers that have adapted their technology to utilizing inedible corn oil, which should be available in even more abundance.

Meanwhile soybean plantings were flat compared to 2016. The big change is in wheat plantings, which were down almost 5 million acres to offset the corn increases — mostly in the western states like Colorado. So, the new corn is going to be somewhat more sustainable — having to be transported fewer miles and chewing up less fossil carbon in the process. Also, sorghum is down substantially from 8.4 million acres to 7.2 million, dropping by more than two-thirds in Arkansas alone.

So, it’s bullish on the whole for biofuels, but not so for growers excepting those who have a secondary market for agricultural residues where some of that expected bumper crop can be put to use for cellulosic production.

The Hard Data

Prospective Plantings: The Digest’s 2016 8-Slide Guide to corn, soy, sorghum, wheat acreage

Son of Billion Ton: The Digest’s 2016 Multi-Slide Guide to the USDA Billion Ton Report

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.

April 03, 2016

Marching Ahead: Ten Clean Energy Stocks For 2016

by Aurelien Windenberger

I’ve been a fan of Tom Konrad’s annual renewable model portfolio for years, so I’m happy to be able to assist Tom with some of his monthly updates.

After two chilly months to start off 2016, the outlook turned considerably warmer in March, both for the market and for clean energy stocks. The Russell 2000 (IWM) jumped 8% for the month, as market participants took to the “risk-on trade” following Fed Chairwoman Yellin’s dovish commentary. Clean energy stocks did even better, buoyed by a reversal in the broader energy sector.

Tom’s  Ten Clean Energy Stocks for 2016 model portfolio pared its losses from Jan/Feb, and is now down only 3.9% for the year, almost exactly the same as its benchmark (see below), which is down 3.8%. The seven income stocks were down 2.3% on average, slightly below the income benchmark, the Global X YieldCo ETF (NASDAQ:YLCO.)  The three growth stocks are now down 7.6%, and performed substantially better than their benchmark, the Powershares/WilderHill Clean Energy ETF (NYSEARCA:PBW),  in March. The overall benchmark mentioned above is a 70/30 blend of the income and growth benchmarks.

The Green Global Equity Income Portfolio, a seed account investing in green income stocks which is managed by Tom, was only up 6.7% during March. However, it has still outperformed all of the other model portfolios, climbing a total of 1.7% year to date.

performance chart

The chart above gives detailed performance for the individual stocks.  Significant news driving individual stocks is discussed below.

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  Dec 31st Forward Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
3/31/16 Price: $19.07. YTD Dividend: $0.381 Forward Annual Dividend:$1.524 (8.0%) YTD Total Return: -7.0%

After two surprisingly poor months to start 2016, Pattern Energy's was up 15% in March. The company's strong fourth quarter results and dividend ex-date in late March were certainly catalysts for the ascent. As mentioned by Tom last month, Pattern Energy’s CAFD (Cash Available for Distribution) is expected to increase to about $2.06/share over the next couple years.

Assuming a 7% yield puts the price up near $30, which might be a conservative target once MLP (Master Limited Partnership) investors learn about Pattern’s MLP-like yields and better risk profile. Anyone interested in learning more about Pattern Energy should read Kevin Neumaier’s recent articles on the company and dig into Tom’s article archive.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  Dec 31st Forward Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
3/31/16 Price: $21.72. YTD Dividend: $0.46 Forward Annual Dividend: $1.84 (8.5%) YTD Total Return: 22.5%

Wood pellet focused MLP and Yieldco Enviva Partners continued its excellent performance in 2016, jumping another 12% during March. Enviva is in an enviable position at the moment, given that it is producing a fuel source that hasn’t been as effected by the general decline in energy prices. As noted last month, the company provided new guidance for total distributions in 2016 of at least $2.10, 19% over its annual distribution rate at the end of 2015.

However, there are some concerns that the EU could take a less positive stance towards wood pellets in the future. For more information, I suggest readers review the comments on this recent article.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
Dec 31st Forward Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
3/31/16 Price: $13.45. YTD Dividend: $0.4025. Forward Annual Dividend: $1.61 (12.0%) YTD Total Return: -14.6%

Like Enviva, Green Plains is a new MLP and Yieldco.  The company's contracts with its parent, Green Plains (GPRE), also insulate it from the general level of economic activity and commodity markets.  However, this insulation is only as good as its parent's solvency.  While GPRE has a strong balance sheet, its ethanol operations are exposed to commodity markets, especially the oil price. 

As expected, GPP recovered along with the broader energy sector during March, although the move up was weak given the lack of any positive company specific news.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  Dec 31st Forward Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
3/31/16 Price: $13.57. YTD Dividend: $0.225. Forward Annual Dividend: $0.90 (6.6%) YTD Total Return: -0.7%

There was no significant news at Yieldco NRG Yield (NYLD and NYLD/A) during March, although the company did announce that their new 20MW solar power facility was completed in Southern California. The stock was up a solid 9% for the month and expects to increase their annual dividend to $1.00 per share by the end of 2016.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  Dec 31st Forward Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
3/31/16 Price: $2.38. YTD Dividend: $.275. Forward Annual Dividend: $1.10 (46.2%). YTD Total Return: -52.5%

Terraform Global's stock had an extremely volatile month due to bankruptcy concerns at its sponsor and controlling shareholder, SunEdison (NYSE:SUNE). While the company did pay their 4th quarter dividend as expected in mid-March, they were not able to release their financials due to accounting issues at SunEdison.

Global also released an 8-K on March 29th confirming that SunEdison is likely to file for bankruptcy protection, a move which would have material negative impacts on Global. SunEdison currently owes Global about 90MW of power plants from their formation agreements, as well as 425MW of Indian solar aseets for which Global pre-paid $231mil in December 2015. The delivery of some or even all of these assets is now uncertain.

Global also has change of control  covenants in certain of their bonds and project level debt which could force the company to pre-pay the debts. On the plus side, the company still has an estimated $750mil in unrestricted cash, along with 814MW of operating plants.

Both Tom and I believe that the company is largely undervalued at current prices. Tom notes that, “even the current bag of assets should produce the cash flow to support a $0.40 dividend, way more than is needed to justify a $2.50 stock price.” It was also good to see that former CEO Brian Wuebbels resigned this week, and that the board of the directors expressly noted that they take their fiduciary responsibilities to shareholders very seriously and remain committed to acting in their best interests.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  Dec 31st Forward Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
3/31/16 Price: $19.22. YTD Dividend: $.30. Forward Annual Dividend: $1.24 (6.3%). YTD Total Return: 3.2%

Clean energy financier and REIT Hannon Armstrong delivered a solid month, performing in-line with the benchmark for the month. As highlighted by Tom many times over the past couple years, the company has an excellent business model that focuses on consistent growth with less risk than most of the Yieldco’s in the space.

HASI generally raises its dividend in the fourth quarter. The above guidance implies that the 4th quarter dividend will be between $0.34 and $0.36, and the dividend will be raised another 4 to 7 cents in 2017.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  Dec 31st Forward Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
3/31/16 Price: C$12.65. YTD Dividend: C$0.22 Forward Annual Dividend: C$0.88 (7.0%) YTD Total Return (US$): 32.7%

TransAlta Renewables continued its excellent performance in 2016, climbing another 18% in March. The stock was boosted in part by continued gains in the Canadian dollar, which was up 4.2% in March. As noted last month, the company recently completed a drop-down of a cogeneration plant, a wind farm, and a hydro facility in Canada from its parent, TransAlta Corp. (NYSE:TAC).

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 
3/31/16 Price: $9.44. YTD Total Return: 1.6%

Advanced biofuel producer Renewable Energy Group saw its stock soar 29% during March, as the company reported better than expected annual results on March 8th. Thanks to the retroactive reinstatement of the bio-diesel tax credit for 2015, the company reported revenues and earnings which were substantially higher than expected by the market. REGI also announced a stock and/or convertible bond repurchase program of up to $50mil, which has likely provided additional support for the stock.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. Dec 31st Forward Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
3/31/16 Price: $3.94/R2.36. YTD Dividend: R0.02/$0.12 Forward Annual Dividend: R0.08 (3.2%) YTD Total Return: -5.8%

Software as a service fleet management provider MiX Telematics finally saw its stock climb again in March, as it was up 13.5%. The stock was also helped by a 7.5% improvement in the South African Rand. The company also announced two new offerings in North America targeting the oil & gas industry. The 2nd in particular highlighted the expected monthly savings to companies using MiX’s fleet solutions, a key consideration given the cost cutting required in the industry today. In addition, MiX has $1.85 worth of cash per share, and a P/E ratio of just over 8.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
3/31/16 Price: $4.77. YTD Total Return: -18.6%

Energy service contractor Ameresco was the only pick aside from Terraform Global to trade down during March. The company reported so-so results in early March, with no news since, so the stock hasn’t seen any interest. On the plus side, insiders continued to purchase more company stock.

Final Thoughts

Last month, Tom highlighted the fact that he was seeing great values across the renewable energy space, and urged investors with cash to buy. So far, it appears that the call was well timed. Even so, most of the stocks remain strong values, particularly the dividend payers. Given their relatively depressed share prices and projections for increasing dividends, total returns of 20-30% annually over the next couple years are not out of the question.


  • Aurelien: Long: HASI, MIXT, GLBL.

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

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