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May 26, 2016

Yieldcos: Boom, Bust, and (Now) Beyond

The Yieldco model is not broken. But investor expectations have changed.

by Tom Konrad Ph.D., CFA

The Yieldco bubble popped almost exactly a year ago after a virtuous cycle turned vicious.

Last May, I explained how these public companies (which own solar farms, wind farms and similar assets) could grow their dividends at double-digit rates despite no internal growth or retained earnings. This “weird trick” can work so long as the Yieldco’s stock price is rising, allowing it to sell stock at higher valuations and increase the amount of money invested per share.

As long as investors expected dividends to continue to rise rapidly, they fed this virtuous cycle by bidding the stock price up, which in turn increased the expected dividend growth. Many Yieldcos increased their dividend increase projections in 2014 and early 2015, when the bubble was at its height.

Yieldco boom and bust

Then the Yieldcos got greedy. 

In the spring of 2015, new Yieldco IPOs and secondary offerings reached a crescendo, with every Yieldco raising new money over a three-month period. There were two IPOS: 8point3 Energy Partners’ (CAFD) for $420 million in June and TerraForm Global (GLBL) for $675 million in July. 

In addition, TransAlta Renewables (TSX:RNW) raised $226 million in April; Abengoa (now Atlantica) Yield (ABY) raised $670 million in May; NextEra Energy Partners (NEP) raised $109 million in May; NRG Yield (NYLD) raised $540 million in June; Hannon Armstrong (HASI) raised $18 million in June; TerraForm Power (TERP) raised $689 million in June; and Pattern Energy Group (PEGI) raised $225 million in July. 

Before that flurry of new offerings, the existing seven Yieldcos had raised only $12.5 billion in total capital. The additional $3.5 billion flooded the market and halted the rise of most stocks. Investors began to scale back their estimates of future dividend increases accordingly. Lower dividend estimates led to lower demand for the stocks, even lower stock prices, and the cycle began to feed on itself in reverse. 

Over the next few months, the departing tide of Yieldco shares deprived sponsors of an important source of cheap finance for over-leveraged business models. It soon became clear which sponsors had been swimming naked: SunEdison (SUNEQ) and Abengoa (ABGB).

Mostly unbroken

SunEdison’s downfall in particular led many to ask if the Yieldco model is broken. Reporters (not to mention investors) have asked me this question on multiple occasions. My answer has always been "No -- except..."

The exception is the double-digit dividend per share growth that Yieldcos led investors to expect during the bubble. With the Yieldco bust in the rearview mirror, I don’t think that investors are likely to bid up stock prices to the point where Yieldcos can restart the virtuous cycle of secondary offerings at higher and higher prices feeding back to rapid dividend increases.

What isn’t broken is the idea of funding clean energy projects with (relatively) cheap stock market capital. When Yieldco stocks were near their bottom, solar and wind developers were openly talking about private equity being a more cost-effective form of capital than the public markets and Yieldcos. 

That situation is inherently unsustainable. The liquidity, better information, and broader spectrum of participants in the public markets ensure that private capital will not remain cheaper than public equity permanently. Private\-market participants have the ability to operate in public markets as well. When the prices are better in the public markets, that is where they will go. 

The opposite is not true for most public market investors: Regulations, lack of knowledge, and the need for liquidity keep them in publicly traded stocks and bonds, even when the returns are better elsewhere. It was only investor hesitancy in the wake of a crash that kept Yieldco stock prices so low for as long as it did. Now Yieldco prices are rising, and these entities can once again think about raising new equity on reasonable terms.

Pulling out the ATM cards

While clouds of uncertainty remain over the TerraForms because of SunEdison’s bankruptcy, other Yieldco stocks have begun to recover, and many are returning to the capital markets to issue new equity.

The strongest (and lowest yielding) Yieldco, NextEra Energy Partners, announced an “At The Market” -- or ATM program -- to sell small amounts of equity during its third-quarter 2015 conference call. Subsequently, NEP raised $26 million in the fourth quarter and approximately $40 million in the first quarter by issuing equity via the ATM. It also closed a $252 million secondary offering in the first quarter.

Toronto-listed Yieldco TransAlta Renewables has also returned to the capital markets by selling CAN $172 million of new equity in December. Unlike American Yieldcos, it never promised double-digit dividend growth, did not see its stock price spike during the bubble, and did not suffer a severe decline when the bubble burst. What decline it did see has now been completely erased by its recent stock rally. 

In their first-quarter conference calls, both Pattern Energy Group and Hannon Armstrong put ATM sales agreements in place to enable more flexibility depending on market conditions.

"We view this ATM as one tool in a broader toolkit, and we intend to use it judiciously for future project-related investments that are accretive and other corporate purposes. Again, to be clear, we do not plan on issuing under the ATM at this time, and at the current stock price. The ATM is only an option for the future," said Pattern CEO Mike Garland.

Hannon Armstrong seems a little closer to using its ATM than Pattern. Hannon CFO Brendan Herron described it as a “filler to help us increase leverage as the larger equity raises result in a lower leverage until we can reinvest and de-lever. We believe...the ATM will benefit shareholders and do not expect it to be a primary source of equity.”

Clearly, neither Hannon nor Pattern is planning on issuing large amounts of equity with this mechanism. But it's a positive signal that they are getting ready to tap the public equity markets.

Most Yieldcos have rallied significantly from their post-bubble lows, but are still far below their highs a year ago. This recovery has allowed several to once again begin to tap the markets for new equity, an early sign of the return to normalcy.

Because of the Yieldcos’ lower share prices and the relatively small size of these new equity offerings, they will not increase the investable funds per share nearly as much as previous offerings. Hence, despite better prices available for the clean energy assets Yieldcos buy, the investments made with the funds will have more modest effects on the Yieldcos’ dividends per share.

Yieldcos are returning to normalcy. We are no longer in the bubble.


Disclosure: Tom Konrad manages and has a stake in the Green Global Equity Income Portfolio (GGEIP), a private fund which invests in Yieldcos and other high-income green stocks. GGEIP holdings currently include CAFD, GLBL,TSX:RNW, ABY,  NYLD/A, HASI, TERP and PEGI.

May 20, 2016

FutureFuel: Still Future, Less Fuel

by Debra Fiakas CFA

The last post “From Fuel to Fudge” discussed how the old Solazyme developer of algal-based renewable fuel has been transformed into a new company called TerraVia, (TVIA) which is pursing algal-based food and personal care products.  Solazyme is not the only renewable fuel company to make an about face.  Granted FutureFuel Corporation (FF:  NYSE) has not changed its name or stock symbol like Solazyme.  However, its ability to produce specialty chemicals has given FutureFuel an alternative to biofuels and its early plans to build a plant that could eventually produce 160 million gallons of biodiesel each year.

It took very little time from the company’s inception for FutureFuel strategists to pull back the biodiesel plant to a 40 million gallon name plate capacity.  Even as the company was getting started in the 2006 and 2007 time frame, margins on biodiesel began to shrink.  Management was worried.  The plant finally ended up with a capacity to produce 58 million gallons of biofuels per year.

FutureFuel was already keeping the lights on by selling performance chemicals.  As much as two-thirds of revenue in the early years was generated by the sale of specialty chemicals, including a bleach activator that was sold to a detergent manufacturer and a proprietary herbicide for a life sciences company.  Biofuels accounted for only about a quarter of revenue.  Fast forward to the year 2015, biofuels are providing the majority of sales and specialty chemicals have taken a back seat.  

Fact of the matter is sales of BOTH specialty chemicals and biofuels have declined.  Biofuel sales peaked in the year 2013, but have since declined on lower selling prices and volumes.  Specialty chemicals sales peaked that year as well.  The herbicide producer has stopped buying the herbicide additive and FutureFuel has had to accept a lower selling price for its bleach activator in order to keep its detergent manufacturer customer through the year 2018.

Rebuilding the specialty chemicals segment is a largely a matter of finding new customers.  It is a situation over which the company has some control.  It is a matter of marketing, branding and messaging.  Then again it could be just a matter of salesmanship and good old fashion shoe leather.  

Unfortunately, in its biofuel segment FutureFuel is experiencing plenty of difficulties  -  none of which are so easily resolved.  Protecting profit margins from costly feedstock is just one of them.  FutureFuel appears to have little latitude on feedstock even as other biodiesel and renewable diesel products have found success. 

There are numerous biodiesel producers, some also using the transesterification process that FutureFuel uses.  An increasing number are using less expensive feedstock, such as waste oils.  For example, Diamond Green Diesel, the joint venture of Darling Ingredients (DAR:  NYSE) and Valero Energy (VLO:  NYSE) uses the waste oils that Darling collects from meat processing plants and restaurants around the country.  Diamond Green just announced plans to expand production capacity.  Another 125 million gallon capacity will be added by the end of 2017, bringing to total capacity to 275 million gallons per year.

Renewable Energy Group (REGI:  Nasdaq) is also expanding storage capacity for both its waste oil feedstocks as well as finished biodiesel at its Danville, Illinois facility.  The storage capacity is pivotal in allowing REG the flexibility of timing its sales at peak or at least better pricing.  The ability to delay sales to wait for better prices is one of the keys to building profits in the fuel production industry.  REG now has 45 million in annual biodiesel production and 12 million gallons in biodiesel storage capacity in Danville.  This facility is only one of a dozen active biorefineries REG has in operation around the country.

In the most recently reported twelve months FutureFuel delivered $48.6 million in net income or $1.11 in earnings per share on $292.2 million in total sales.  The company remains profitable, but comparisons to the previous twelve months are not favorable. Even in the most recently reported quarter ending March 2016, the company reported sales 10% lower than the previous year period.  Earnings we well above expectations, but only because the company benefited from reinstatement of the blenders tax credit.

FutureFuel has tried to break free from its biofuel origins, finding new products and new customers.  It seems investors might be doing the same.  After a brief recovery, the stock has sold off, leaving FF priced at ten times expected earnings for the year 2016.  We note that the stock was nearly at the same value about two years ago.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  Crystal Equity Research has a buy rating on Darling Ingredients and a Hold rating on FutureFuel.

May 19, 2016

KiOR: The Inside Story Of A Company Gone Wrong, Part 2

by Jim Lane

Note. This is Part 2 of our series on the inside true story of KiOR.

In part 1 of our series, here, we explored: the formation of BIOeCON and KiOR, the problem of too much oxygen and coke, the entry of Khosla Ventures, and the loss of a CEO. Also, “a recipe for technical failure”, disastrous pilot scale results, culture clashes, catalyst development, reactor design trouble and the departure of a key scientist.

Two KiOR scientific wings emerge

No one was more emphatic about the pilot plant results than scientist Robert Bartek, who sent an email ‘More Math on BCC’ on December 7th, stating:

“We are in a period of denial. We must forget that our original conceptions of BCC are not right and must do something radically different to save the Project”.

By the end of 2008, it is clear from discussions with multiple KiOR sources that the KiOR scientific staff had divided into two groups. One group believed that the BCC Technology had been sufficiently tested, was not working, had no value to KiOR’s business and should be immediately stopped.

The other group, which was headed by O’Connor, focused on improving the BCC Technology, and on support of the three European Labs doing so. The controversy over the R&D Plan for 2009/2010 — to the extent that it exacerbated a growing rift between O’Connor and Ditsch — would have far-reaching consequences as 2009 unfolded.

Paul O’Connor confirmed that cultural problems were rife at KiOR at this point.

“Part of this was my problem because I wasn’t there full time in Houston,” O’Connor told The Digest. “Basically I was the CTO, and André [Ditsch] had no experience in FCC biomass or hydrotreating, but he had it in his head that he was second in command to Fred. When I was away he would push it in another direction. Because people considered him Samir’s boy [Samir Kaul, a partner in Khosla Ventures], and no one dared to criticize him much. I did, and that became a problems.

“Partly, that was the Houston culture. In The Netherlands as in places like San Francisco and New York, everyone tells you exactly what they think of you even in the management meeting, we fight like crazy but we resolve issues and make up. In Houston, people don’t often want to talk about the problem. It’s a case of everything is fine, everything is great, and Fred was very good at that.

“But there were problems to be solved, and there would be all these in-fights between myself and Ditsch, and with so many new people. Everyone wants to invent their own process and thinks they have the right ideas. Fred never really took a stand, he always stayed out of it.”

No team, no stable technology

“One problem that hurt KiOR,” O’Connor recalls, “was we just had too many people from Albemarle. Catalysis is important, but what we needed also were process engineers, and people with experience in hydrotreating and operations. The balance went wrong.

“And then there was this entirely different idea, coming I suppose from the Khosla approach to business, and André himself in some ways represented this approach, which was to go out and hire a whole bunch of MIT PhDs. But you need time to train them and they are not the ones who are going to scale up a process.

“And so it became a struggle to unite all these people into one team, and in that struggle I began to struggle with Fred, and it became a case of Fred and André on one side, and although I stayed around until the end of 2009 my influence was minimized.”

By all accounts, at the beginning of 2009, as one source familiar with the state of technology development described it, “KiOR had no Technology that was sustainable, competitive, cost-effective, and economically/technologically feasible, and the operating funds were practically depleted.”

By all accounts, at the beginning of 2009, as one source familiar with the state of technology development described it, “KiOR had no Technology that was sustainable, competitive, cost-effective, and economically/technologically feasible, and the operating funds were practically depleted.”

The fateful Columbus first commercial-scale plant

The fateful Columbus first commercial-scale plant

A Stealth Team forms

Amongst the loosely-associated group of staff that felt the BCC technology as designed was hopeless, a “save the company” effort launched on a stealth basis.

Their goal? Reliable, data showing increased bio-oil yields of reasonable quality using less costly catalysts and processes. The new data, demonstrating a feasible technology, could be used by KIOR in business development, and to convince new investors in funding efforts.

The timing? Those who were aware or active in this effort took the view that time was critical, not only because KiOR, as a company in development, was shortly going to be starved for funds if results were not forthcoming; they were also concerned that the plans and design of the demonstration-scale Unit (a 10 ton/day biomass processing capacity) needed to be formulated, firmed and contracted out for fabrication. And any new technology would need to be developed before that.

Out of a wider group, catalyst expert Mike Brady, FCC unit expert Robert Bartek, solid state chemistry expert Dennis Stamires, and Drs. Vasalos and Lappas of CPERI in Greece would be the most visible. Their concern was not only the development of a technology that could save KiOR from disaster, but doing so in a way and in a time frame that would not cost them their own jobs.

In February 2009, Stamires wrote to a scientific team composed of Bartek, Yanik, Loezos, Cordle, and Brady, proposing that, at the KiOR Pilot Plant, test runs to duplicate published test data obtained from other similar Pilots using the same biomass feed and sand as a heat transferring medium. This was the baselining project which had been specifically ruled out for the KBR pilot.

Paramount the need to ascertain why the CPERI FCC Pilot Plant produced higher bio-oil yields than the KiOR pilot. The Stealth Team decided to conduct a “Round-Robin” testing program where both Pilot Plants would use the same biomass feed, sand/catalyst and process conditions.

The idea?

Stamires reasoned that, if Prof. Vasalos and Dr. Lappas at CPERI , who had a similar FCC Pilot plant in operation, could pyrolyze the same kind of biomass with sand, under the same process conditions, the team could confirm that new KiOR pilot was working correctly. If the CPERI FCC Reactor design was responsible for the higher Bio-oil yields, then the design could be introduced into the KiOR Pilot.

On the same day, Bartek replied: “I agree! I am hoping we can do significant alterations to the process to assure some chance at victory in the next two months, so we do not purchase the wrong DEMO“.

After baselining the pilot plant, the expectation was that new catalysts could be tested aimed at improving bio-oil yields. Specifically, Bartek speculated that it was “Time for some Z?”

Meaning “ZSM-5 catalyst”. A commercial grade, high-priced catalyst, well established in the market place, being used by most oil refineries worldwide, containing the ZSM type of Zeolite. Papers had been published by Dr. Paul Williams at Leeds University in 1995 indicating that zeolite catalysts would not produce a high bio oil yield, but could produce, as one observer put it, “a reasonable amount with a substantially improved quality containing a lesser amount of oxygen, easier and less costly to be upgraded to gasoline and diesel fuels.”

Whose technology is this, anyways?

The other team? In a March 5th memo to the KiOR community, a R&D review of the BCC Technology, specified the continuation of the R&D work on BCC Technology in all four Labs.

As O’Connor confirmed to The Digest, “one of my biggest frustrations was that the technology that was moving forward was never actually the BIOeCON technology. What we were doing in Valencia was not what we did later in Houston. If you look at the first patents and so on, you see that the basic trick was to have an interaction between the biomass and the catalyst before it enters into the reactor. We called it mechano-chemistry. When I compared the data between Houston and Greece, Greece was better, and that was because in Houston, they never pre-treated the biomass.

“That created more conflict with Ditsch. He had a ‘make it simpler, don’t do that’ attitude towards it. And you could sort of get away with it in the pilot plant because you could mill the biomass very fine. But when you get to demo scale, much less commercial, you can’t mill the biomass like that. For one, it can get sticky. It can even catch fire in the plant, which happened.

“But if you are feeding [larger] wood particles of 1-3 MM instead of this finer sort, it takes quite a long time before the particles heat up, and the outside can get charred while nothing happens to the inside.”

So you coke up and lose yield.

Cannon sidelined by heart problems, and “who’s in charge?” chaos ensues

But the week of March 8th would prove even more fateful for KiOR, as CEO Fred Cannon was hospitalized with a heart problem and was sidelined for some weeks, in hospital or at home, while recuperating.

And so, a leadership crisis erupted.

By March 19th, O’Connor emailed the staff, “In the absence of Fred, I have assumed his responsibilities to assure a smooth continuation of our business.” Most staff at the time took that to mean that, as soon as Cannon returned to the office, O’Connor would assume his former duties.

But more than that was going on.

Cannon had received a memo from O’Connor, expressing concern about the leadership of KiOR, the direction KiOR was taking, and a lack of team effort and communications between groups. O’Connor expressed the view that, if matters continued as they were, key personnel would leave the company.

Some discussions took place over a potential revision of management duties and structure, which failed, not the least because as Cannon explained, even if he really wanted to re-divide CEO responsibilities and authority, he could not do that without a resolution and approval by the KiOR Board.

A degree of chaos ensued, and morale dropped. In Cannon’s absence, VP for Strategy Andre Ditsch also stepped forward to assume more commercial responsibility, and it became at times unclear to staff who was in charge.

One observer recalls, “[Ditsch and O’Connor] were calling their own regular staff meetings at the same time, and starting to re-organize and re-assigning responsibilities and projects to the staff.”

The controversy over the research program boiled over. Those familiar with this period at KIOR said that Ditsch “accused O’Connor of grabbing for Cannon’s job”, and having failed to develop a feasible technology, despite two years of investment in R&D.

The battle reached the KiOR board in March 2009. The board confirmed Cannon as President and CEO of KiOR, Ditsch remained VP for Strategy; in May 2009 O’Connor was re-assigned from the CTO role, although he continued to work for KiOR until November 2009 when his contract expired.

Observers of KiOR during this period stress that, although Cannon returned to the office by the end of March, Andre Ditsch assumed some extra managerial functions and, according to one observer, “was communicating frequently directly with Samir Kaul (a KiOR Board member, representing Khosla).”

Dead Man Walking

While the management crisis was unfolding, the Stealth Team had outlined new catalysts and had made the request to test these, and to calibrate the KiOR pilot plant with sand. The request ultimately would have to be made to Ron Cordle, the Pilot Plant supervisor, as a confidential, weekend test. The backup plan was to have CPERI run the tests in their pilot in Greece.

“It was like the blind leading the blind,” Stamires recalled. “The KiOR pilot plant reactor was deficient and underperforming and not capable of producing optimum bio-oil yields. Adding to this structural Reactor problem, and [later] the additional problem of the data manipulation of John Hacskaylo. The combination of these problems resulted in a general situation where nobody knew what we were actually doing, what oil yield numbers to believe.”

As Robert Bartek would express in a March 28th memo:

“You had already been hounding me to get sand in the Unit. At that time the three of us started on this, I had already accepted the fact that I was a “Dead Man Walking” in Fred’s organization and my time at KiOR would be short. So why not one final act of defiance? If you are going to be let go, let’s do it for a noble project reason rather than politics. May be we could rescue this thing and snatch victory out of defeat we [are] heading into.”

Ultimately, the sand test was carried out, using sand obtained from CPERI, and confirmed that higher oil yield was produced at the Pilot Plant at CPERI in Greece. That finding prompted Bartek and Stamires with further discussions with Lappas and Vasalos, to arrange a meeting with Cannon and Vasalos in Houston. And an agreement was made with Cannon that CPERI would license the design of their Reactor to KIOR

With this, the Reactor at KiOR’s Pilot was replaced with a new Reactor constructed according to the design of the CPERI Pilot Plant. With some process variables optimizations, the KiOR Pilot Plant was able to produce higher Bio Oil yields.

Work on catalysts also continued. The Stealth Team was convinced by that time that the BCC Catalyst (the synthetic clay) was a very poor heat conductor, and incapable of transferring a sufficient amount of heat to the Biomass fast enough. They thought that a new material with high bulk density, low porosity microspheres, with a low catalytic activity, would be much more suitable.

By March 9th, the Stealth Team had obtained, via “a friend at BASF”, 5 gallons of high temperature calcined clay microspheres, which were tested secretly at the KiOR Pilot Plant. In a memo on March 27th, Bartek reported to O’Connor, Yanik and Stamires an overall substantially improved performance over the BCC Technology and its Catalyst. Oil yields were higher, there was less coke, and a reasonably low oxygen content in the oil. The Stealth Team began to make arrangements to purchase a Spray Drier and a Calciner to be able to make calcined clay microspheres.

Meanwhile, a March 13th 2009 report from Peter Loezos entitled Mass Balance Data “validated again that BCC technology was not working for KiOR,” an observer reported. Dennis Stamires added, “It was mainly due to the very low bio-oil yields.”

Stamires also pointed The Digest to an independent validation of the performance of the HTC catalyst (i.e. the Hydrotalcite, HTC), published in 2013 in the Defect and Diffusion Forum by F. L. Mendes, A.R. Pinho, and M.A.G Figueiredo. That report concluded:

“The use of either the FCC catalyst or hydrotalcite are not suitable for intermediate pyrolysis reactors, generating a product with high water content and low content of organic compounds in bio-oil and produce more coke. None of the materials tested produced bio-oils with considerable hydrocarbons yields and presented high amounts of phenolic compounds. In general, silica had the best results in terms of yield and quality of bio-oil.”

Both Mendes and Pinho were working for Petrobras in Brazil, and during this period it has been asserted to The Digest that KiOR was involved in negotiations with Petrobras, regarding forming a joint venture, or licensing KiOR’s BCC Technology. Suggesting though not proving that the journal results reported were related to KiOR story.

The Tipping Point

By April 2009, Cannon had returned to his desk at KiOR, but according to an observer, for some time after Cannon returned, “In reality, it was Ditsch and [Kaul] who were managing KiOR, and Cannon seemed to be a bystander, and sometimes their spokesman.”

One notable change in the company’s management style? “Most of the important and crucial issues were only discussed in the new mini-Management Team of Ditsch and Cannon, in communication with Samir,” one team member recalled. “Not in the weekly general management team meetings as was done before.”

The problems facing KiOR at the time were substantial, but not unheard of for a young company in the advanced bioeconomy. They were summed up internally at this time as:

*Finding new investors to provide further funding as KiOR was soon running out of monies.

*Having not yet developed and demonstrated a feasible, sustainable and profitable technology, it was difficult to convince new investors to provide funds for KiOR’ operation.

*Soon running out of monies, will be difficult to keep the R&D function going on, which was needed to develop new sustainable technology.”

*The large processing capacity Demonstration Pilot Plant Unit (DEMO Unit ) was being designed and will require several millions of dollars to be constructed and installed at the Houston KiOR site.

*Negotiations were going on with Chevron / Weyerhaeuser/Catchlight Energy, involving the formation of a joint venture, in which KiOR will provide the technology to convert waste wood to liquid fuels. However at that time, KiOR did not have technology that was sustainable and commercially feasible and profitable.

*KiOR was in a great need to have a feasible demonstrated technology which can be commercialized and be economically sustainable and profitable, for use in the discussions and application to the DOE for getting a loan guarantee of a $1 billion, for use in building commercial Plants.

*KiOR was in need to have, at pilot plant / DEMO Unit scale, its Technology demonstrated and validated that was feasible, economically sustainable and profitable, while discussing with the Mississippi Development Authority a $75 million loan.

*Morale of KiOR’s employees was very poor with a fragmented Management leading in different directions, while key technical personnel, either had left or were looking for new jobs outside KiOR.”

*KiOR’s competitors Ensyn and Dynamotive were fast developing and improving their technologies, and preparing for commercialization.”

65 gallons per ton, but not really

It was this latter point — the progress of Dynamotive, that perhaps formed a tipping point in the story of KiOR.

For, coincidentally or otherwise, we see the first appearance of 60+ gallons per ton yields, a level of yield that would eventually feature prominently in KiOR’s 2011 IPO, in an analysis written by Andre Ditch — not of KiOR’s results, but of Dynamotive’s.

Ditsch was juggling — at haste — data from Dynamotive and results from a UOP/PNNL project as reported in the September 2008 issue of Hydrocarbon Processing, written by a team led by Jennifer Holmgren (nowadays, CEO of LanzaTech), then GM of UOP’s Renewables unit, entitled “Consider Upgrading Pyrolysis Oils into Renewable Fuels”. He notes that he is “running out of daylight for report, but a few comments”.

Later, he comments “IF (big if) we assume the UBA oil and our Kaolin oil are similar (without more data, a stretch)…”. Later still, he added that “all this is written in great haste, so feel free to add and pressure test numbers.” All indicative of a memo written in back-of-envelope calculations.

Overall, Ditsch projected a break-even for KiOR at a yield of 65 gallons per ton of biomass, or a 22.5% yield of bio-oil from the biomass.

From this point forward until the end of 2013, it will be impossible to find a commercial projection or communication based on less than 60 gallon per ton yields, or a scientific set of data from any KiOR pilot, demonstration or commercial unit that has a yield of 50 gallons per ton or higher (even at an oxygen content of 17% that would be very difficult to upgrade).

Exotic yields get mentioned like "business as
usual" scenario baselines in this KiOR slide

Exotic yields get mentioned like “business as usual” scenario baselines in this KiOR slide presentation.

“We need 2X”

By June 2009, the Stealth Team, working with zeolite catalysts in the Pilot Plant, were showing enhanced yields and bio-oil quality. At the same time, literature searches turned up projects from the 1980s and 1990s demonstrating that the same type of Zeolite (ZSM) had been used before in Catalytic Pyrolysis.

But with the improvement, KiOR yields approached a maximum of 40 gallons per ton with reasonable quality. “Higher yields would have been simply contained more oxygen, that would have needed to be removed to convert the bio-oil to transportation fuel,” Stamires told The Digest.

A progress update was held on June 3rd with Khosla, Samir, Cannon, Ditsch, O’Connor and others, Bartek reported the figures.

Khosla’s response was to request of the R&D team that they double the yields over the next 6-8 months. The improvements were not from outer space. They were the kind of yields that would have made the overall process economically sustainable and profitable, without government subsidy, in commercial-scale plants. A participant in the meeting reported to The Digest that certain milestones for monthly incremental increases were established to reach the target.

Possible? Yes. With the existing BCC technology. In the view of one wing of KiOR’s staff, no. Given management’s reluctance to change the R&D plan, add a reactor to the process, hire scientists who could accomplish these goals, numerous members of the scientific team were pessimistic both in terms of the target and the timeline.

Concerns were high, as commercial discussions with Chevron and Weyerhaeuser (as the JV Catchlight Energy) were well underway. As one team member put it, “if Chevron finds out, they will run away from KiOR and essentially seal KiOR’s fate from any future partnerships with Big Oil, and Khosla would pull his funding.”

The race for 2X gets underway

The search for catalysts was underway at a rapid pace.

Cannon approved the request of Brady, Bartek and Stamires to start making KiOR’s own calcined clay microspheres using the spray dryer. The main objective of this work was to develop clay-based microspheres which exhibited acted both as efficient heat carriers, and catalysts with controlled selective activity.

Having then optimized the Physical properties of the calcined microspheres with respect to Bio-oil yield and quality, Brady, Bartek and Stamires proceeded to optimize the chemical/catalytic properties of the calcined microspheres. Then Brady proceeded to prepare clay microspheres with different amounts of catalytically active metal salts — magnesium, calcium, potassium, sodium, and aluminum among others.

In addition, Professor Iaocovos Vasalos re-appeared as a consultant by September 2009. Subsequently, Prof. Vasalos confirmed to Cannon that in order to achieve reproducible Bio oil Yields close to Khosla’s 2X target, with a reasonable quality, certain “radical changes must be made in the design of the pilot plant and to the process.”

The urgency was not only the usual pace of s start-up hungry for milestones that would encourage investments, there was Catchlight Energy relationship looming. In an email from Dan Strope, VP Technology, sent Aug. 11 2009 to the staff, it was revealed that Andre Ditsch was officially heading the negotiations with Chevron, and Ditsch was asking for technology data to prepare an economic forecast for a commercial size plant.

Yields improve, but trouble looms

In an email to Fred Cannon and Andre Ditsch on September 23rd, Bartek reported pilot plant data confirming that the ZSM catalysts produced much higher hydrocarbon yields, as the BCC Catalyst (HTC ) was converting them to gas and coke. The oxygen was in the range of 10 to 15%, but the yields were still stuck in the low 40s. With these results, the decision was taken in late 2009 to suspend work on the BCC technology at the three European Labs as well at KiOR’ Lab in Houston.

Paul O’Connor, still on the KiOR board at this time, blasted the decision to use ZSM-5 catalyst.

“It was the worst decision ever made, ZSM-5. We all knew that to make this process economic we needed a cheap catalyst. ZSM-5 is one of the most expensive around. Plus, you are dealing with a biomass with calcium and many other things in it, and with ZSM 5 you kill the catalyst. It’s so strange they went in that direction.”

But yields at least were up. A 20-30% jump in yields, but catalyst performance, the science team concluded, would not improve anywhere as fast as the 2X target required. In a memo dated Sept. 6, 2009, Stamires proposed a radically different Biomass Conversion system, comprising two Reactors in series or in parallel, with a new catalyst.

The approach? The Biomass in the first Reactor would be thermally Liquefied in a fluidized bed using a high-efficiency heat transferring medium which has a high heat capacity (such as sand ). The Bio oil vapors generated in the first Reactor would then be reacted with a medium activity catalyst in the Second Rector. The invention was subsequently patented by KiOR .

Meanwhile, Ditsch was pressing hard. In emails of Sept. 16 and 17, 2009, he was asking for information to be used in his presentation and “KiOR Update” to Khosla on the 17th .

From that update, Khosla agreed to relax the timeline for process improvement, but not sacrifice the yield target, which would have been in the 80s and into the 90 gallons per ton range. The 2X milestone target was set for Q4 2010. But the scientific team — at least one wing — didn’t believe that anything like those yields could be achieved with anything like the technology that KiOR was readying for commercial-scale.

Stuck in the 40s Doldrums

New catalyst materials were tested in KiOR’s Pilot KCR plant in October and November 2009 Bartek and reported by Patrick Steed in a January 7, 2010 email confirmed the improvement in catalytic activity, while retaining their good heat-transferring properties.

But, the good results came with a ceiling. In their own way, they confirmed to members of the science team, as sources told The Digest, that KiOR was likely to become stuck in a range which would never get much out of the 40s, expressed in gallons per ton.

2010 dawns, with a design input issue

In January 2010, though, focus was on a potential 20% bio-oil yield improvement possible by employing CPERI’s reactor design, compared to the yields obtained by the present design of the KCR Pilot plant (a FCC type).

The Pilot Plant was remodeled with the CPERI design, but to the surprise of the team, the Demonstration Unit design was not changed. According to those familiar with the timelines, the Demo Reactor was already fabricated and was soon to be delivered to KiOR for installation, based on the old, obsolete original KiOR Pilot Plant Reactor design.

Eventually, the large Reactor of the Demo Unit, with a 10 ton per day capacity, would have to be dismantled and be replaced by the new Frustum Reactor licensed from CPERI. Resolution of the problem would lead to sensational additional costs and delays in the operation of the Demo Unit.

How could this have happened? As it turns out, Robert Bartek, described by one team member as “the expert who had supervised the Pilot plant testing work at the KBR Pilot Plant after De Deken had left, who had managed the design and operation of KiOR’ KCR Pilot Plant and who had worked closely with Prof. Vasalos and Dr. Lappas in transferring their Reactor design to KiOR,” was left almost completely out of the loop.

According to KiOR team members of the time, Bartek “was intentionally kept in the dark and out of the design work of the Demo Unit until almost to the end of the project.”

Why? Perhaps because Bartek was openly and clearly criticizing the BCC Technology and its Catalyst for being “a failure and useless to KiOR”.

“Suggestions and disagreements were considered to be politically incorrect, and rather blasphemies against the party-line prevailing in 2009, supporting and promoting exclusively the BCC Technology and its Catalyst,” remarked Dennis Stamires, when asked about the crisis. More than one KiOR team member contended that the decision to exclude Bartek from the Demo design process, among other consequences, convinced Bartek to resign.

About NASA syndrome

There are some classic management set-ups that lead to failure, one of which is NASA syndrome. The type of management failures that were prominently on display in the Challenger and Columbia disasters. As the Columbia Accident investigation Board reported:

The organizational causes of this accident are rooted in the space shuttle programs history and culture, including the original compromises that were required to gain approval for the shuttle, subsequent years of resource constraints, fluctuating priorities, schedule pressures, mischaracterization of the shuttle as operational rather than developmental, and lack of an agreed national vision for human space flight. Cultural traits and organizational practices detrimental to safety were allowed to develop, including: reliance on past success as a substitute for sound engineering practices (such as testing to understand why systems were not performing in accordance with requirements); organizational barriers that prevented effective communication of critical safety information and stifled professional differences of opinion; lack of integrated management across program elements; and the evolution of an informal chain of command and decision-making processes that operated outside the organizations rules.

Finally, the Board noted:

The pressure of maintaining the flight schedule created a management atmosphere that increasingly accepted less-than-specification performance of various components and systems, on the grounds that such deviations had not interfered with the success of previous flights.

The NASA cautionary tale is instructive; there are correlations between KiOR and Columbia.

Specifically, reluctance to test to understand why systems were not performing in accordance with requirements, organizational barriers that prevented effective communication of critical information and stifled professional differences of opinion; lack of integrated management across program elements; and the evolution of an informal chain of command and decision-making processes that operated outside the organization’s rules.

KiOR was on a fast-paced commercialization track, as it
highlighted in this company slide presentation.

KiOR was on a fast-paced commercialization track, as it highlighted in this company slide presentation.

Never commercially viable?

The technology’s progress was under close scrutiny by February 2010, when it was decided to form a Diligence Team consisting of Prof. Vasalos and Dr. Stephen McGovern, a hydroprocessing expert. The review included data and related information derived from KiOR’s R&D work, as well from literature including patents, and data from the CPERI Pilot plant.

By this time, concerns about the data stream from the pilot also became an issue within the company. Stamires himself recalls six such meetings with CEO Fred Cannon, on February 10, March 13, March 26, April 28, May 7, and May 12. What was Stamires bothered about? Specifically, “manipulation and inflation of the pilot plant Bio oil yield data.”

The results of this comprehensive and in-depth Technology Assessment Review Study by Vasalos and McGovern were published in April 2010. Flat out, the report contained the most dismal news possible. The assessment concluded that the maximum yield, based on the pilot plant, was in the low 40s with 15% oxygen content, using ZSM catalysts.

Recommendations were made for improvement. According to one familiar with the report, by and large, these recommendations “were ignored by the Management Team, and not implemented.”

The Impending Public Statement on the Technology

Meanwhile, there was pressure on the company to make disclosures regarding the company’s progress towards scale, and the yields it was achieving, Specifically, there was pressure on regarding a statement describing KiOR’s technology that could be placed at the KiOR Website and also to be given to the public and potential investors.

Dennis Stamires confirmed that there was a controversy. He himself sent an April 5th memo to CEO Fred Cannon and VP Technology Dan Strope, calling for only “Credible” information only to be released. "The message in the event of being Legally challenged, it should be defendable.” He did not receive a response, he said.

On April 10th, a draft Technology Statement to be posted on the KiOR Website, prepared by Matt Hargarten of Dig Communications, was circulated by Andre Ditsch. It would not reach some members of the scientific team until as late as May 11th.

An uproar ensued regarding the draft statement. Bottom line, there were heavy complaints about false claims, misleading information and fake terms like “KiOR’s Proprietary Magic Catalyst“. CFO Kevin Denicola indicated to team members that he too had serious concerns about the truthfulness of the proposed Technology Statement.

Inflated Numbers: The July 2010 Report

In May 2010, John Hacskaylo joined KiOR as VP R&D. With Cannon and Ditsch, they formed what was described to The Digest as “The Troika, [which] manages all the important issues and business items of KIOR”.

The issues? These would grow to include:

The negotiations with the Mississippi Authority regarding a loan of $75 million; negotiations with Chevron / Catchlight regarding the formation of a joint venture; the Technology Review/ Assessment by R.W. Beck; the Application to DOE for a $1 billion Loan guarantee; the preparation of the KiOR S-1 Prospectus for a NASDAQ IPO; negotiations with potential investors, and updates on KiOR’ s technological progress.

One team member wrote of this time:

The formation of “The Troika” caused a deep division and disputes among KiOR’s managers, which later on dripped down to lower levels of operations, and prevented normal working business communications among employees. Hacskaylo created and highly promoted this culture. R&D personnel were told to whom they can talk and to whom should not talk about their work. Co-operation, trust and willingness to communicate fast disappeared, and a spirit of fear of being punished and fired prevailed in the organization.”

In a July 2010 Report, entitled “Yield Improvement Efforts”, according to those familiar with the report, Hacskaylo replotted the previous Pilot plant data to show a steady substantial oil yield increase in the period of 2009 – 2010, claiming that the Pilot was 50% ahead of the Vasalos report’s findings, in gallons per dried ton of Biomass feed and projecting an 80% increase in yield from the upcoming Demo Plant, or 72 gallons per ton.

The yields, according to key members of the science team, were simply not true, and incredibly inflated. The results were inflated from the latest pilot data. Further, the Demo plant as designed at this time did not incorporate improvements that KiOR had deployed at the pilot.

As one observer noted, “Hacskaylo’s new, much greater inflated oil yields, generously met and even exceeded the milestones which earlier Ditsch, Kaul, and Khosla had set forth to be accomplished quarterly for the year 2010, by the R&D group. Hacskaylo managed to accomplish (on paper only) the [required] milestones of increased Bio-oil yields”, without the bother of actually improving the process, so went the theory.

It is not known whether financial motives, data confusion, or honest mistakes went into the July report or into the criticism thereof. It can be noted that executives of KiOR were rewarded with stock options for meeting milestones and accomplishing goals, but there’s no direct evidence that data was changed for monetary gain. It is clear however that the new data was not supported by those familiar with the raw data coming from the pilot plant. The Digest has obtained and carefully reviewed original data from the pilot from this period and the July 2010 report, and can confirm that the raw data and the July 2010 report do not agree.

Another report was made to Khosla in November 2010, and again team members say that the data was “corrected” and the yields “improved” from actual KiOR data. We are all left to guess exactly why.

At this stage, Denicola is reported to have attempted “professionally…to correct this problem and give the public and investors a truthful and representative account of the actual status of KiOR’s technology at that time,” according to one team member familiar with his efforts, but he was unsuccessful. Denicola subsequently resigned.

Bleak refinery upgrading report and a “see ya later” from Catchlight

In May 2010, samples that had been provided from the KiOR Pilot were the subject of a report from Catchlight Energy, the Chevron /Weyerhaeuser Joint Venture. Catchlight reported on two samples, one containing 11% oxygen content and one containing 17%. Their conclusion: they couldn’t effectively process either sample. O’Connor told The Digest that Exxon also reported trouble.

They did indicate that they believed that, with time, a process could be found that would tolerate the 11% oxygen content sample, though it would require alternative equipment that Catchlight was not in a position to finance. They further indicated that the 17% oxygen content bio-oil could not be processed by any existing refinery plant hydroprocessing equipment, and that new technology would have to be developed from the ground up, for that.

Either way, the idea of delivering a bio-oil to Catchlight was out. Catchlight indicated that, going forward, they would only be interested in handling a finished fuel blendstock that had been hydroprocessed by KiOR. Whether that meant using standard or modified equipment, or developing a new technology, would be up to KiOR and at KiOR’s expense.

KiOR does not disclose Catchlight Energy's deep
reservations in this slide deck overview given in 2013.

KiOR does not disclose Catchlight Energy’s deep reservations in this slide deck overview given in 2013.

Selling it to Mississippi

“By mid-June 2010,” as the state of Mississippi recounts in its lawsuit, “Khosla Ventures had retained Dennis Cuneo to assist KiOR in obtaining a favorable state economic development package. Cuneo is a former Toyota executive who enjoyed valuable relationships with Governors of southern states. Cuneo quickly arranged meetings for KiOR and Khosla with the governors of Arkansas, Louisiana and Mississippi. The first executive level meeting between the State of Mississippi and KiOR occurred on July 1, 2010 at the office of Governor Haley Barbour. Three entities were present at the meeting: KiOR, Khosla Ventures and the State. KiOR was represented by Fred Cannon, Mike McCollum (KiOR’s Vice President of Supply) and Andre Ditsch. Khosla Ventures was represented by Vinod Khosla, Samir Kaul and David Mann. Also present for Khosla Ventures was Dennis Cuneo. The State was represented by Governor Barbour and two MDA officials, Adam Murray (MDA Project Manager) and Justyn Dixon.”

Among the documents providing support for the meeting’s agenda was “An Overview of KiOR in Mississippi” white paper, provided to the Mississippi Development Authority, which made the following claims:

1. “Existing refining infrastructure can easily upgrade the oil into transportation fuels, making KiOR’s oil a direct substitute for imported crude oil without changing the refining to automobiles supply chain and infrastructure.”

2. “Our product is a high quality crude oil that can be converted into on-spec gasoline, diesel and jet fuel with standard equipment in operation in every US refinery.”

3. “Our process is already competitive with oil at $50/barrel with existing subsidies, and will be competitive with $50/barrel oil without tax credits in 2-3 years with catalyst tuning and process development, allowing economical access to nearly all available feedstock.”

The state of Mississippi alleges that the financial information provided to the state “did not account for the construction and operation of a hydrotreater and hydrogen plant at the Columbus facility.”

At the time, KiOR may have well held out hopes that a hydrogen plant could be built in partnership with a vendor, who would pay for construction and operation and charge a hydrogen delivery fee to the project. However, given the July 2010 date of the initial Mississippi meeting, there is no doubt on the Catchlight score. At best, KiOR may have believed that other refiners would be able to process its bio-oil.

Did KIOR include water in its bio-oil yield claims?

KiOR’s assertion that the technology “is already competitive with oil at $50/barrel with existing subsidies” seems remarkably similar to the speculative analysis completed by Andre Ditsch at the time of the UOP/PNNL paper, based on 65 gallon per ton yields. There is no documentation that The Digest has been able to uncover, nor any scientist we have interviewed familiar with the actual data out of the pilot plant, that supports KIOR yields at breakeven points.

A KiOR staffer relates a tale about André Ditsch. “Suppose you had a restaurant that seated 200 people,” Ditsch is reported to have told a KIOR team member, when questioned about the reporting of the KiOR numbers. “And, you only seated 10 today, but you were going to seat all 200 in the future. If you say that you are at 100% occupancy, that’s not misleading, because you are going to be at 100% eventually.”

The truth may well be that the KiOR yield claims were based around liquids, rather than bio-oil, coming out of the process.

The state of Mississippi alleges just that. Specifically, that:

“Ditsch’s failure to accurately adjust for losses to water and other waste products also rendered the representations to Mississippi officials false. When the BCC reactor was operated at high oxygen levels (greater than 10%), a substantial percentage – more than 30% – of the biocrude produced by the BCC reactor was lost to water.

“Ditsch’s failure to make an appropriate reduction for losses to water served to substantially inflate his yield estimate; and, as a consequence, the Company’s financial projections misleadingly made the Company appear commercially viable. Neither KiOR nor Khosla nor Cuneo notified Mississippi officials that the Company’s financial projections were grossly inflated to overstated yields.”

Paul O’Connor, as a member of the KiOR board, has a similar theory.

“Hacskaylo, what a disaster area. The 67 gallon figure, that is where I became suspicious. The board hardly saw technical information, as you can imagine people like Condoleezza Rice were not going to be very familiar with technical detail. They were showing us graphs with yields of 68-72 gallons per ton out of the pilot, and they aid that the demo plant was even better. Now my initial reaction was — you’ve got 100 people working in R&D, you’ve got all the best equipment in the world, you’ve figured it out, that’s great.

“But one day I noticed the R&D director, John Hacskaylo fiddling around with the axis, and in his comments to us, he was talking about top of the reactor yield.

“Top of the reactor? That’s the yield coming out of the pyrolysis unit, but that is not the yield coming out of the plant. You have to condense, and you have to recover oil from water, and you lose in the hydrotreater, because for one thing you have to take out oxygen. It’s not a real yield coming out of the plant.

Top of the reactor yields, in the context of transportation fuels, is like counting scotch and water as pure scotch whiskey. Or including the weight of the orange peel in a projection of orange juice yields.

“If you’re saying 68 at the top of the reactor, at best you are making 55 in the plant. At best. So that’s when I insisted on a technology audit,” O’Connor told The Digest. “It was definitely not at 68-72. There were some points where you could get above 60 but only momentarily, under ideal conditions, for instance with very fresh catalyst. And only in the pilot.” O’Connor confirmed that the demo plant was generating yields in the 30s or low 40s at most.

“Who did the analysis? Were they just stupid or crooks?” O’Connor asked. “It’s not for me to say.”

A company on the brink

The company was speeding towards a 2011 IPO. But the fuel yields were low; the fuel was not usable by their initial chosen downstream partner; the catalyst they were using to get even down to this unsatisfactory product, ZSM zeolite, was in the $7,000 per ton range. Catalyst stability would be challenged, everyone knew, with the water that is contained in wood chips. Steam can be highly problematic for zeolite.

More than that, the company was facing a potential problem with the metal content in the biomass feed that accelerated the deactivation rate of the catalyst, which resulted in excessive amount of daily catalyst replacement, according to one KiOR scientist.

There were reactor design issues. The pilot reactor that was working wasn’t used for the demo unit.

There was a rush to commercial-scale of the NASA type. Management issues, communications issues can be seen. Disclosure issues, “truth in data” issues. And, a series of statements to the state of Mississippi that would be impossible to live up to without major improvement in yield. Capital needs were going to be tremendous, and beyond an IPO there was a loan guarantee process and the state of Mississippi loan application to be successfully navigated.

Why the rush to scale? All venture-backed companies rush. But was there a special rush on with Khosla-backed companies, and did that rush apply successfully to industrial technology? The State of Mississippi quoted this passage from the Harvard Business School case study, Khosla Ventures: Biofuels Gain Liquidity:

“Khosla played an active role in helping his portfolio companies determine appropriate milestones in the process of moving from a pilot to a commercial operation. He encouraged his companies to focus on 15-month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

The goal was to test ideas in 10% of the time that it would take a large company. Once that was achieved he often challenged the team to reach another 10x reduction in cycle time. month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

Everyone was counting on everything to improve in the demo unit, and in 2011. As sometimes happens. And, with design corrections, fingers crossed this could be translated to a commercial-scale unit. It’s been known to happen, yields improving as scale increases and design improves. Not always, not often, but sometimes. Could KiOR pull it off?

Maybe, just maybe.

KiOR was hanging by a thread as the summer of 2010 commenced. In a few days, the first recorded visitors to Pasadena demo unit, representatives of the Mississippi Development Authority, were expecting to see the demonstration unit in action.

We’ll see how all those concerns worked out in the next part of our series, as KiOR launched its demonstration unit, geared up for more financing and an IPO, and hurtled towards commercial-scale.

Further reading.

The O’Connor resignation letter
The March 15 2012 O’Connor email memo
The March 22 2012 O’Connor technology assessment
The April 21 2012 O’Connor technology assessment
The April 30 2012 O’Connor memo
The Spring 2013 O’Connor note

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.

May 18, 2016

KiOR: The Inside Story Of A Company Gone Wrong

Jim Lane

Not long ago, KiOR quietly re-named itself Inaeris Technologies and launched a modest website which discussed the technology and management in little detail, but focused to an extraordinary extent on a declaration of values.

Empowerment, honesty, fairness, “lessons learned from our collective experience” and so on. Warm, kindly Hallmark Card sentiments, universally popular, admired and vague.

Not the bold, We-Are-Black-Swans, detailed descriptions of yields, costs, downstream partners, brand-name board members and timelines to commercial scale that had been the style of the Old KiOR.

Old KiOR was exciting, dramatic, and fast, and the headlines it produced between 2008 and 2011 were candy for a renewables-hungry world.

A Breakthrough in Catalytic Pyrolysis to make cost-competitive, drop-in renewable fuels. A “Magic Catalyst”. The backing of a celebrity investor in Vinod Khosla. An impending venture with Chevron and Weyerhaeuser. A star-studded board featuring former Secretary of State Condoleezza Rice. A massive loan from Mississippi. A celebrated IPO. Reports of high yields. Construction at full-scale. 13 million gallons to start, multiple projects on the way.

Real Fuels Today

A slide presented by KiOR in 2013, prior to the bankruptcy filing.

And then the shortfalls started. KiOR fell further and further behind on its production goals throughout 2013, and ran out of cash and tumbled into bankruptcy in 2014. Ultimately, the state of Mississippi filed a lawsuit alleging that the KiOR technology hadn’t been ready for scale, its management knew that fact, that the company had faked technical data, and overstated commercial progress to lenders to secure financial support.

Scandal erupts


Paul O’Connor

That there was a turbulent KiOR story to be uncovered was of little doubt. In late 2014, The Digest published a string of correspondence from co-founder Paul O’Connor to the KiOR board, alleging a wide range of scientific mis-steps and warnings unheeded on the technology’s viability.

In part, O’Connor wrote:

“It is obvious for all of us today that KiOR is going through some difficult times, and may even not survive as a company. The reason for this, in my opinion, is not because of the failure of the technology itself, but because of several wrong choices made during the development and commercialization of the technology. Over the years there have been several warning signals (internal & external), one of which as I mentioned in the foregoing has been my own technology audit report in March/April of 2011. Notwithstanding these warnings KiOR’s MT continued on their set course. In mean time everyone else hoped for the best.

“The real proof-of-the-pudding however would be a successful start-up and operation of Columbus in 2013…[but] it became clear however that the product yields were in fact much lower than projected [**], while the on-stream times were also way too low [**]….My observation was that the low yields and on-stream times at Columbus were reasonably in line with the results and experience in the DEMO plant in Houston. This means that the main problems at Columbus are already discernible in the DEMO operations and are therefore structural and not “just” operational issues.

“I am of the opinion that KiOR’s [management team] professionally has not performed in evolving the KiOR technology to a commercial success; furthermore the MT in my opinion has not provided the board of directors of KiOR with the adequate, right and relevant information to do their job. I therefore am of the opinion that the MT needs to resign and to be replaced in order to improve the chances of success of KiOR and/or any other potential new ventures based on KiOR technology in the future.

The complete O’Connor resignation letter is here.

And a friend wrote to The Digest during this period, stating:

There might be more to the Kior bankruptcy…..seems the equity player/majority shareholder was stripping the cash, there might have been some issues shall I say with Mississippi development authority and if I were a betting man I’d say that both sides are examining the validity of the reps and warranties in their agreements.

In Fall 2014, I received a note from Paul O’Connor, proposing a presentation for ABLC 2015 entitled “Biomass conversion: On learning from past mistakes” (= Is there life after KiOR?)”.

Was I interested? O’Connor wanted to know. You bet I was. We discussed it by email and subsequently in person on Key Biscayne in February 2015. But lawyers intervened and the presentation never materialized.

By then, O’Connor was traveling with Alex Major, best known for his “Can We Still Fly Jets & Save the Planet?” presentation given at a number of industry conferences. Major had a plan to acquire the on-site assets at Columbus and produce jet fuel and green power. In mid-February, Major wrote:

The KiOR legal case is a complete bag of worms that if John Grisham got a hold of it would make a fabulous legal thriller and an interesting movie!! Regardless of whether Paul is going to speak or not, I would like to attend the ABLC. Hopefully we will have a chance to chat over a tea or a glass of wine at some point so that we can discuss the KiOR lawsuit.

And then, the Freak Show

For others, the freak flags were flying.

In a Motion filed in the United States Bankruptcy Court for the District of Delaware on February 12th, Robert C. Dalton, CTO for ESTEC Technology Works objected to a motion by Mississippi Development Authority to convert KiOR’s Chapter 11 re-organization to a Chapter 7 dissolution. ESTEC had made an offer for KiOR’s assets.

In part, Dalton wrote:

The Grand Wizard of Magic Catalysts, Robert C. Dalton and his “Magic Kingdom”, ESTEC Technology Works LLC, are in possession of a collection of volumes of secret books that contain spells (formulation of materials and processes) for energy applications, chemical synthesis, environmental applications, food processing and biotechnology as well as now [sic] search for Daltonite, a quasi-mineral, that is in our Solar Systems and most likely is found throughout the Galaxy.

ESTEC Technology Works, LLC will soon be announcing the formation of their new “Solar Systems Exploration Division Incorporated” and ESTEC/Dalton will be searching areas at, near or around Mars, Neptune and Jupiter to locate one or more facilities to search for Daltonite and to develop and launch technology to supply energy, oxygen, habitat and infrastructure for the expansion of the reach of humans and their colonization beyond Earth and Low Earth Orbit”.

Now the story can be told

For two years, the KiOR story been one part circus, one part asset grab, and one part “What the heck happened”? But now the smoke is clearing.

Looking towards the future, Inaeris Technologies is the emerging remnant, described by its President Chris Artzer as, in essence, a Series A venture-backed company, at pilot stage, aiming to demonstrate the technology it believes will be robust and which it aims to demonstrate in time. In the case of Inaeris, as Artzer adds, it has the benefit of being at pilot stage but having produced a million gallons of in-spec, drop-in renewable fuels.

What of the past? Since last winter, we have visited with multiple parties intimately familiar with KiOR’s science and commercial progress dating back to its formation, and we have reviewed dozens of documents relating to technology development, yields, and commercial claims from 2007 — that tell the true story of KiOR.

The pressing question is, exactly how and why did the yields and costs promised in the IPO, 67 gallons per ton of biomass with an eventual target of 90 and at a cost of $1.80 per gallon, fail to be realized in the first commercial plant at Columbus?

The road to the 67 gallons per ton claim

In 2006, renewables were in the air.

In mid-June, VeraSun Energy went public selling 18.25 million shares at $23 per, raising $425 million. Shares of the already-public Pacific Ethanol (PEIX) doubled by late spring, despite the company not opening its first plant until the end of the year. Hawkeye and Aventine went public at sky-high prices. Congress was planning a vastly expanded Renewable Fuel Standard.

By late June, Khosla Ventures entered into biofuels in a big way, forming a venture called Cilion to operate modular 55 million gallon ethanol plants, aiming to build 8 by 2008, the first three in California.

Several months prior, in the Netherlands, Paul O’Connor had taken note of the trends as well. He had been serving as a Business Development Manager at Albemarle Catalysts after Albemarle bought the catalyst business from AkzoNobel. This, on top of 20 years at Akzo, culminating in work as the worldwide development manager for FCC catalysts.

The key here is the FCC unit — a fluidized catalytic cracker. It’s a standard unit at more than 400 oil refineries worldwide; one-third of the world’s crude oil is processed in a FCC reactor.

The use of synthetic zeolites and their modified forms, as FCC and hydrocracking catalysts, has revolutionized the petroleum refining business. The use of zeolite-based FCC catalysts has made possible to achieve substantially higher conversion yields of gasoline and diesel fuel from each barrel of crude oil refined.

As Wikipedia explains:

Fluid catalytic cracking is widely used to convert the high-boiling, high-molecular weight hydrocarbon fractions of petroleum crude oils to more valuable gasoline, olefinic gases, and other products. Oil refineries use fluid catalytic cracking to correct the imbalance between the market demand for gasoline and the excess of heavy, high boiling range products resulting from the distillation of crude oil.

With the popularity of biomass-related ventures in 2006, the question had become, as former KiOR process engineer Lorenz Bauer explained to The Digest, “Could you send [biomass] up real fast with a catalyst into a FCC reactor?” But he adds, “Anyone who thinks it’s simple is kidding.”

There were five basic scientific questions.

1. Could the biomass be sufficiently pretreated, and how, to become FCC-compatible?

2. Could a catalyst be designed to work with biomass and achieve similar results to catalysts working on petroleum hydrocarbons?

3. What would the reactor look like?

4. Would any resulting bio-oil contain too much oxygen to be refined into a fuel using standard refinery equipment?

5. Could all of the above be achieved by a design that was economical?

What was the goal of the process and the catalysts, anyway?

Simply put, the chosen route was catalytic pyrolysis. In this approach, the goal is to crack the biomass molecules arriving at the front end of the reactor (composed of hydrogen, carbon and oxygen) under the right combination of pressure and temperature. To give an everyday example, cooking food is a high-temperature, ambient pressure form of pyrolysis.

Using sufficiently active, selective and robust catalysts, the hope is to produce at the end of the reaction a high yield of hydrocarbons that can be upgraded into transportation fuels.

Here’s the good and bad news. Good? Biomass pyrolysis has been known for a long time to produce gas, coke, char and some bio-oil. Bad? As of 2007 — however, not enough oil, and of insufficient quality to be economically upgraded into transport fuel.

The purpose of KiOR’s technology was to shift the balance radically towards bio-oil and away from gas, coke and char, and to bring down the levels of oxygen in the bio-oil.

The state of Mississippi summarized the goals in their lawsuit:

Pyrolysis oil retains approximately the same amount of oxygen content as the biomass used to create it. This amount is typically in the 40-45% range, which is far too high to be refined within the existing infrastructure of today’s oil refineries. The primary and essential goal of KiOR’s catalytic process was to reduce the oxygen and acid content of its biocrude to a level that could be successfully refined by oil companies in their existing infrastructure, while still maintaining biocrude yields that were high enough to render the Company profitable.

Biomass to fuel process

The KiOR process, from a industry presentation in 2013.

The formation of BioECON

To explore the use of biomass in a FCC reactor, among other concepts, Paul O’Connor founded BIOeCON BV in the Netherlands and Dutch Antilles. O’Connor was President and Technical Director, Armand Rosheuvel was Financial Director, Rob van der Meij was Commercial Development Director, and scientist Dennis Stamires was retained as Scientific Advisor and Consultant.

It was a world-class team. Stamires had been conducting R&D work in the area of Heterogeneous Catalysis using natural, synthetic and modified forms of Clays and Zeolites since 1955. He was a member of the team working at Linde, a division of Union Carbide, which in 1960 first announced these mind-bending zeolite catalysts at the International Congress of Catalysis in Paris. And O’Connor was already working at AKZO NOBEL’s Catalyst Division on a project involving the conversion of Biomass to liquid transportation fuels, using a Hydrothermal process and a synthetic clay (Hydrotalcite) type catalyst. Stamires and O’Connor had worked closely together at what had become Albemarle.

Their cooperation resulted in several new inventions; one focused on new anonic clay catalysts for use in the transformation of biomass to Bio-oil, as filed with the US Patent Office in April 2005, as “Process for Producing Liquid Hydrocarbons from Biomass”.

In the end, sources told The Digest that Rosheuvel arranged for the original funds to operate the Company, which were reported in Harvard Business Review in 2009 to have totaled €1 million.

A modified FCC reactor design and a catalyst suitable to biomass — these were the primary needs.

Too much oxygen, too much coke

Here was the good news. Researchers such Dr. Iacovos Vasalos and Dr. Angelos Lappas at CPERI in Greece had shown that catalytically inert inorganic materials, such as sand and refractory alumina, could deliver the amount of heat needed to pyrolyze biomass.

But most catalysts had a biomass flaw, we learned from experts. The bio-oil they produced was very acidic, corrosive and unstable. That is, too much oxygen. Hydrocarbon fuels don’t have any Os, and the presence of excessive oxygen can compromise fuel stability and engine performance.

Some catalysts could produce bio-oils which contained much less oxygen. They were in the right range on acid and stability. But there was too much darn gas and coke, scientists told The Digest — when it comes to making fuels, coke is not it. Coke isn’t worth much, and neither is gas. The solids and gases had to be minimized.

Kior process

So too did the costs. The better catalysts are cost whales. As much as $6-$8,000 per metric ton for ZSM-5 catalysts. An average FCC catalyst would cost close to $2,000 to $3,000 per metric ton.

But there was an opportunity. Why not use the same anionic Clays (known as HTCs) which are effective in removing Sulphur containing molecules from gaseous streams and liquid Hydrocarbons? They might be also effective in removing oxygen from the bio-oils.

The fatal flaw would only turn up later. Experts told The Digest that combining de-oxygenation and pyrolysis in the same reactor just doesn’t work well enough. They would need to be done separately to eliminate the oxygen without producing too much gas and coke. But that would not be uncovered until 2010.

ITQ is retained

One of the new ideas to be explored involved bringing a catalyst or simple chemicals like an acid, base or a salt into close contact, or inserting such chemicals inside the biomass particles, for the purpose of lowering the liquefaction temperature and increasing catalytic activity/selectivity.

To explore that concept, the Instituto de Technologia Quimica (ITQ) of Univesidad Politecnica de Valencia in Spain was contracted to conduct experimental work.

Khosla Ventures enters the picture

Vinod Khosla

Vinod Khosla

BIOeCON needed additional funds to operate and to support the outside contractual R&D work, and was also looking to find investors. Alex Stamires, who was working with Khosla Ventures on an unrelated project and whose father was consulting for BIOeCON, contacted Khosla executive assistant Cyndi Jung in the first week of October 2006. Jung managed the “catch-all” email inbox for venture ideas and was a logical first stopping point for making an introduction. Calls followed, and a write-up summary of BIOeCON‘s background and business interests, a telephone pitch, an in-person meeting, and several months of due diligence.

“The due diligence was no small thing,” O’Connor told Harvard Business Review. “They hired four specialists to look at our technology, and this went on in a very intensive way for three or four months. In the end, their conclusion was that it was very interesting but at an early stage. We needed to do a pilot.”

Khosla Ventures offered a term sheet in the second half of 2007; an agreement was reached to form a joint venture, KiOR, which was incorporated in Delaware on Nov. 1, 2007. It received a Series A investment which totaled $1.436M on November 15, 2007 and $2.916M on July 14, 2008. A Series A-1 investment of $9.999 million was also made in July 2008. All investments were made by Khosla Ventures II, LP.

Rob van der Meij was appointed President and CEO, and Paul O’Connor became CTO and was a KiOR Board member.

The end of the honeymoon, and a change of CEO

The honeymoon ended almost immediately. It was clear that the newly-minted KiOR would be moving to America. Khosla’s request to the company was to hire talented, highly experienced and creative technical personnel, and the US bench was the deepest. But, where?

Strong disagreements ensued. At first, the company set up shop temporarily in Houston. The company consisted of Rob van der Meij (President and CEO), Paul O’Connor (CTO and KiOR Board member), Jacques De Deken (Director), Hans Heinerman (Director), Robert Bartek (Applications Manager), Steve Yanik and Mike Brady. Dennis Stamires was appointed Senior Fellow Scientist, on a consulting contract.

Denver and Houston were the Headquarters finalists. The pro-Denver contingent preferred to be close to the National Renewable Energy Laboratory in Golden, the University of Colorado and the Colorado School of Mines. It was an area, where, as one member of the team put it, “a lot of highly educated persons were living. R&D work was going on at NREL on renewable fuels and the NREL management had expressed interest in collaborating with KiOR.” Papers putting the case for Denver were circulated amongst management on March 19, 2008 and June 1, 2008.

So, why was Houston chosen?

Ultimately, three factors came into play. One, the company was already there. Second, Houston afforded access to expertise in catalysts and in FCC unit development and operation.

The third Houston advantage was more problematic but ultimately decisive. By April 2008, in the April/May 2008 period, arguments and disagreements emerged between Rob Van der Meij and Paul O’Connor. The issue regarded, as one person familiar with the problems remembered it,“ primarily, Van der Meij’s style of management and the direction KiOR was going.” Not long afterwards, Samir Kaul, representing Khosla Ventures on the KiOR board, was called in, and ultimately Rob van der Meij departed in May.

Fred Cannon

Fred Cannon

Among the candidates to replace van der Meij was Fred Cannon, an executive formerly the head of AkzoNobel’s (and later Albemarle’s) catalyst business. He had worked with O’Connor in the past. As the Harvard Business Review outlined:

O’Connor had a hunch that the still-nascent technology to convert Biomass into Liquid Fuels (BTL) would make significant advances over the next decade. “In 2004, BTL was still virgin territory in terms of patents and processes,” recalled O’Connor. “I believed that if we went into this now, we would be leaders.” O’Connor took his idea to Fred Cannon, then Houston-based vice president for Albemarle’s Alternative Fuels division. Cannon was excited by this idea, and the two presented it to the president of Albemarle. However, the president declined to invest in BTL.

Cannon had a successful interview with Khosla and was hired as the new President of KiOR in June 2008. Management then decided to locate the KiOR lab and office facilities in Houston where Cannon was living.

KiOR consultant Dennis Stamires remembered:

“By locating in Houston, there was a very limited number of qualified technical personnel with the type of expertise needed by KiOR available to be hired, or willing to move to Houston to work for KiOR. Therefore, a lot personnel was hired who had no experience in the area of KiOR’s business or qualified for the job. Some were friends or ex-colleagues to Cannon and O’Connor.”

“Not even close to what other people had done”

Just as the company was experiencing its spring 2008 management crisis, the results began to come in from the lab work in Valencia. The results were disappointing.

The pyrolysis testing results of the pretreated biomass samples were based on what has been described as “expensive catalyst (an inorganic synthetic material, and a proprietary to BIOeCON).”

Among the problems? ITQ’s data showed excessive amounts of water, coke, gas and char and a relatively small amount of bio-oil that had a low acidity. But there was more. KiOR technical personnel began to voice concerns about scaling up the process, and extra costs in removing the impregnated metals on the biomass, and associated environmental problems/costs to dispose waste byproducts, and contaminated water.

ITQ Valencia was reporting:

51% liquids — in all, 21.8% water and 29% organic liquids — 21% gas and 27% coke and char.

Results at this level are discouraging, scientists told The Digest, because of the high char, the high coke levels. Also, the oil content was low. The water content was described as “very high”, and in all, the results did not indicate “an economic process, and not even close to what other people had done.” Moreover, the organic liquids were expected to contain high oxygen levels, so that the actual fuel content would be much lower.

“A Recipe for Technical Failure”

In the summer of 2008, Dr. Jacques De Deken, a Technology Director, who had flagged the problem of the bad ITQ results to key scientific team members, raised a red flag to management. He indicated his view that the KiOR BCC Technology was not on track to produce at commercially viable qualities or yields, and that KiOR must make a drastic change both of the process and the catalyst.

According to sources familiar with the company’s activities at the time, Cannon and O’Connor agreed to discount De Deken’s findings, and reject his recommendation to change the process and the catalyst.

There are two versions of De Deken’s departure from KiOR. In the state of Mississippi’s lawsuit against KiOR, the state contends that De Deken was a KiOR consultant, who resigned from the Company in September 2008. The state contends that “Vinod Khosla discussed with De Deken the reasons for his departure and requested that De Deken provide a written memorandum…Khosla forwarded DeDeken’s critique to Cannon on October 13, 2008.”

However, the letter of resignation has subsequently come to light. In fact, De Deken was a KiOR employee rather than a consultant, and his last day in the office was August 11, 2008. On that day, De Deken provided directly to O’Connor and Cannon a detail of his objections. In part, scientific. But in another aspect, cultural.

“I was hired by KiOR as its Director of Technology,” De Deken wrote, “with the understanding of being responsible for all of KiOR’s process development and engineering activities.” De Deken protested that after 5 months of employment, “KiOR is in breach of our agreement”.

He stated that “the strategy in rushing towards demonstrating the BCC technology at a multi-barrel-per-day scale without corroborating experimental data, under the pretense of self-deception of ‘creating value’, is a recipe for technical failure. Indeed, I do not believe that we currently have the experimental results, catalyst(s) or science base to justify the rush and expense of an LPBCC unit or demonstration in the Ivanhoe facility at this time.”

Culture Clash

But De Deken was not finished. He aimed his next comment squarely at the management culture of KiOR.

“What is even more worrisome is that genuine efforts to establish a dialog about relevant technical issues have been met with systematic attempts to downplay or dismiss virtually every issue as soon as it is brought up. Clearly, the creation of lasting value is not possible without also developing credible, sound and robust technology. KiOR’s obvious lack of commitment to building a strong and much-needed R&D effort to make this possible is a further indication that KiOR is not really serious about developing successful technology.”

Sources familiar with the company’s operations and internal communications have confirmed to The Digest that although the company did not disclose internally the reasons for De Deken’s resignation, “most persons involved knew the real reasons, since Jacques was also strongly objecting the plans under discussion at that time, to use the same BCC Technology as described in the ITQ report, at the FCC Pilot Plant of KBR Corporation in Houston, as he was expecting it to be a waste of monies and valuable time of KiOR.”

The move to the KBR pilot plant for testing

One reason why De Deken’s resignation came at a difficult moment was that he was closely involved in negotiating and making all the technical arrangements to test the BCC Technology at pilot scale, and the company had expected to start the testing in mid-September 2008. As the state of Mississippi summarized in its lawsuit:

The first technical step to commercializing the technology would be to develop a pilot project, for which KiOR needed a suitable laboratory space. The pilot scale unit would produce several liters of biocrude a day, less than a barrel. A second step, which would need to follow quickly on the first, was the development of a smaller, laboratory-scale unit, producing in one employee’s words “a few cubic centimeters per run, with many runs a day that will allow us to look at a lot of variables” in terms of feedstocks, catalysts, and pretreatment techniques. This unit would pre-screen catalysts and feedstocks before these entered the pilot lab in larger quantities. Once the pilot unit was up and running, KiOR would move toward the development of a demonstration project, producing between 10 and 100 barrels of biocrude per day.

KBR, a major oil refining engineering concern, maintained a FCC pilot unit that was located very close to KiOR’s offices in Houston, and their unit was selected for KiOR process and catalyst testing, scheduled for September 2008.

A crisis of design

By this stage, and independent of any testing that would take place with the KBR-designed pilot unit, a quiet war of ideas had erupted within KiOR regarding the design of KiOR’s reactor. Specifically, hope was fading among technical staff and consultants that a “one-pot reactor” would work as originally hoped.

A fundamental concept that Paul O’Connor and Dennis Stamires formed was combining the two reactions of pyrolysis and catalysis in one reactor, occurring simultaneously. Consolidated bioprocessing had been described as “the Holy Grail of biofuels” by Dartmouth’s Lee Lynd, and “one-pot reactors” were very much in vogue at the time.

On the fermentation side, companies like Mascoma and Qteros were developing bugs that could accomplish extract sugars from cellulose and ferment them, simultaneously.

It was rare but not unheard of. Combining pyrolysis and catalysis had been explored as early as 1998 by a research team led by Vasalos and reported in the Journal of Applied Catalysis, where a typical FCC Pilot Plant and a commercial FCC catalyst was used.


Proving the soundness of the technology was critical to KiOR’s pathway to success.

Needed: a new catalyst and heat-transfer material

The BIOeCON concept, which became the proposed KiOR reactor technology, was to employ a new (non-FCC Catalyst), a synthetic inorganic clay-like material, which exhibited certain deoxygenating activity for producing low oxygen-containing Bio-oils. The regular FCC Catalyst used by Vasalos was used widely in oil refineries to crack petroleum feedstocks to light hydrocarbons and make gasoline. But the regular FCC catalyst would leave too much oxygen in the bio-oil, making it unsuitable for upgrading.

The material in question? Hydrotalcite, or HTC.

It was an anionic synthetic clay of the mineral class of double-layered hydroxides. Both O’Connor and Stamires had, and in many cases, together with Prof. William Jones from Cambridge University in UK, and with many others at AKZO NOBEL and subsequently at Albemarle, done extensive R&D work using LDHs as catalysts or sorbents in several types of oils upgrading and conversion, and commercial oil refining and upgrading applications.

Here was the weakness of the concept, which would turn up in testing.

“By combining in one-pot reactor these two distinctly different reactions,” Stamires would later recall, “the thermolysis (a heat transfer/physical reaction) with the deoxygenation/decarboxylation (a chemical reaction), the efficiencies and selectivities of both reactions would be highly compromised and distorted. It produced more water, gases, coke and char.”

As Stamires would tell The Digest:

“To achieve a high efficiency liquefaction of biomass, these small particles must receive a high heat flux in a short time, following with a quick efficient quenching of the Bio-oil vapors. To accomplish this, we needed to use a material which has a high heat capacity and also high heat transferring properties, a good heat conductor. As was ascertained later on, the anionic type of clays, such as the Hydrotalcite, has a very low heat capacity and heat conducting properties. That’s because of its highly porous crystal structure, and low bulk density.”

From the start, then, hydrotalcite was the wrong material to use, The Digest was told.

But testing would turn up another problem. Hydrotalcite is a very active catalyst, used primarily for promoting oil gasification type reactions; the surface gets quickly coated with heavy tar like carbonaceous materials, which further reduce its heat conducting properties when present in a one-pot biomass liquefaction reactor.

But that wasn’t all.

Hydrotalcite was found to have a very high gasification catalytic activity and very efficiently converted most of the biomass oxygen and carbon to carbon monoxide and carbon dioxide gases, and water. Leaving only a small portion of the biomass carbon and hydrogen to form liquid hydrocarbon bio-oils. So, yields with HTC were doomed to be low — in addition to the tarring problem and the heat conduction issue.

A new material is developed

The KiOR R&D team, though stymied by the troubles with HTC, developed a novel theory that the HTC material might be modified to address these shortcomings.

Stamires, working with KiOR R&D manager Mike Brady, a catalyst technology expert, asked CPERI chief Dr. Lappas to calcine (or heat treat) to at high temperature a sample of HTC, for sufficient time to completely destroy the crystalline structure and porosity.

Stamires recalls:

“This high temperature treatment transformed the original crystalline Hydrotalcite to a new material of the Spinel class, which exhibited very low pore volume and surface area, high bulk density, and low catalytic activity, and it was a totally different material to the original Hydrotalcite. When tested in the KCR Pilot Plant, as a heat transfer medium and also as a catalyst for biomass liquefaction to produce Bio-oil, this new material having the Spinel crystal structure, produced much more Bio-oil, with a reasonable low oxygen content, than it’s precursor Hydrotalcite.

“This material, with Spinel–like structure, exhibiting bi-functional properties, specifically, as a heat conductor and as a catalyst that proved to be a useful material for use by itself or in combinations with other materials in biomass thermo-liquefaction process.”

The switch to a two-pot reactor that didn’t happen

The R&D team were beginning to see a fatal problem emerging with the one-pot design, in test results obtained at the ITQ Valencia Lab, as well as later on by the tests done at KBR’s Pilot Plant in Houston and subsequently at KiOR’s own KCR Pilot Plant.

The two distinct reactions taking place at the same time (i.e., the physical/Thermolysis and the chemical/decarboxylation/cracking), as it turns out, require individual customized process variables optimizations, and are different for each reaction. So, there’s what one source familiar with KiOR’s process described as “a gross compromise of the individual efficiencies of these two different processes, resulting in a very poor liquefaction and Bio-oil and Bio-oil yield, while a substantial amount of carbon and hydrogen are converted to carbon oxides and water.”

An inflection point

At this stage, these are lab discoveries. Certain results had been disappointing. And, there was disappointment in the efficacy of a single reactor to conduct both reactions simultaneously. It’s not surprising given the novelty of running biomass through a FCC reactor, modified or otherwise. Complicated physical and chemical reactions are taking place simultaneously, with side and cross reactions. It’s the nature of science to explore these puzzles and solve problems.

It was a bleak but not fatal outlook. Better results were obtained with a modified HTC. A new “Two-pot” system, having individual reactors for thermolysis and for cracking, could have been pursued aggressively at this inflection point. In fact, Brady, Cordle, Stamires and Loezos filed a patent application on such a KiOR technology, which was granted in 2012. More on that here.

Prior to the IPO, these steps were not taken in a systematic way, The Digest was told.

Starting up at the KBR Pilot Plant

A dispute erupted within the KiOR community in September 2008 over the testing program for the FCC Pilot Plant at the KBR facility in Houston. Issues included the biomass feed, which included the pretreated biomass feeds, catalysts and process conditions.

Some emphatically stated that before any new materials be tested under different process conditions, and with other process variables, a systematic calibration of the equipment and processing scheme should be first done to establish a reference base-line.

“Especially since this FCC Pilot Plant had not be used before for pyrolyzing biomass in the presence of a catalyst,” as one KiOR staffer would recall later.

It was not a difficult test series to mount. Well known process parameters were available from many similar tests and equipment used before, and there was research papers published regarding optimum process conditions for maximizing bio-oil yields, using sand as a heat carrier, in the absence of a catalyst. Ensyn, for example, had been using sand for years as a heat carrier in a pyrolysis reaction.

The purpose? An equipment check and standardization test, including the duplication of published similar test results, would have given information to confirm that the equipment was working as intended, and given a baseline of performance for this FCC pilot unit, compared to pyrolyzing biomass in different reactor designs, under same process conditions and with the same heat transferring medium. In short, setting a starting point where the impact of a new KiOR reactor design and a new catalyst could be measured.

In a memo to staff dated September 18, 2008 and addressed to all KiOR personnel, entitled ‘KBR Plan’, CTO Paul O’Connor objected doing any calibration to establish a baseline, and the use of sand in the KBR FCC Pilot Plant equipment, and requested to take out from the 2008-09 Experimental plan the use of sand and equipment calibration. The reasoning is not clear. Possibly the costs and the timelines, based on KiOR’s timelines to scale and available cash. Perhaps other factors.

For sure, by the first week of October 2008, the FCC Pilot Plant at the KBR facility was ready to start testing KiOR’s BCC Process and Technology. The pretreated biomass feed and the catalyst were the same ones that were used in the tests performed at ITQ in Valencia earlier that year. The same set-up that hd led to the discouraging results were reported to KiOR the previous spring by ITQ.

Funds run low

By Q4 2008, a staffer recalls that “available funds to operate KiOR were practically depleted, and a considerable amount of the available funds were consumed in R&D funding of the four Labs conducting projects for KiOR’s business mission and objectives, and this difficult situation became a serious concern and aggravation to certain KiOR Managers.”

By this time, work was underway at ITQ (Valencia, Spain); Twenty Universit (The Netherlands); CPERI (Greece); and KiOR’s own lab in Houston.

And, the BCC one-pot reactor and the previous catalyst were not discarded, either — work proceeded exclusively on these systems “for over one more year,” according to one staffer, “while delaying KiOR for another year in starting to develop a new feasible Technology.”

An Internal War Rages

In October 2008, KiOR’s VP for Strategy, Andre Ditsch, “who also was looking to raise funds urgently needed for KiOR to operate,” as one observer put it, issued an internal challenge to the cost and results associated with the work with the outside labs. Cost was one issue, but usable information was another.

“Ditsch concluded that KiOR was not getting any useable and valuable information from these four KiOR sponsored R&D projects. Also it was holding back the KiOR R&D work from being able to develop new technology that could have been able to meet the KiOR business objective,” recalled Dennis Stamires.

In October 14th and October 18th emails to CEO Fred Cannon and CTO Paul O’Connor, Ditsch questioned the value of sponsoring such outside R&D work, and proposed to terminate all the three outside contracts. As an alternative, he proposed to use the funds to hire qualified technical personnel to do the work at KIOR’s own laboratory facilities.

The result? In the short-term, discord and friction between Ditsch and O’Connor, which staffers described as becoming more serious and disruptive to KiOR’s business in the following months.

But Ditsch was far from alone in questioning the value of the work. More than one year later, Robert Bartek, writing on Nov. 30, 2009, said “From my point of view, the value of the work done at Valencia is essentially useless“. With the departure of Jacques De Deken, Bartek had assumed the direct responsibility of Catalyst Development and Pilot Plant testing work, reporting to the CTO.

However, the work was not stopped or fundamentally re-scoped, as the timing of Bartek’s email outburst confirms. The reasons are unclear.

Disastrous results from the FCC pilot test

With De Deken gone, the Pilot Plant testing work at KBR was supervised by Peter Loezos and Robert Bartek, and testing started the first week of October. The results of the tests were reported on Nov. 20, 2008 by Peter Loezos in an email entitled ‘KBR Mass Balances’.

“Overall, the oil yields in the KBR results were much lower than those reported in the ITQ Report from the Valencia R&D group,” a staffer recalled, “where they used in their tests the same biomass and pretreated biomass, as well as the same catalyst.”

An analysis and report of the tests at KBR was issued on Nov. 20, 2008 by KiOR Science Director Dr. Conrad Zhang confirmed the low yields in a report entitled ‘Summary of analytical results from test results reported on November 3rd, 11th, and 14th. The yields have been described as “never above 30 gallons per bone dry ton of biomass” in terms of gallons per ton by those familiar with the results.

The story continues

We’ll explore what happened with KiOR and those “never above 30 gallons’ yields, in the next part of our story, tomorrow.

Further reading

The O’Connor resignation letter

The March 15 2012 O’Connor email memo

The March 22 2012 O’Connor technology assessment

The April 21 2012 O’Connor technology assessment

The April 30 2012 O’Connor memo

The Spring 2013 O’Connor note

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.

May 16, 2016

From Fuel To Fudge

by Debra Fiakas CFA

This week the last reminder of the renewable fuels business that was once called Solazyme will be gone.  The old Solazyme has abandoned the goal of producing renewable fuels using the oils from algae.  Instead, under a new name TerraVia, the company is directing its algae cultivation and harvesting knowhow toward growing edible algae for food and personal care products.  To make the change complete the old stock symbol ‘SYZM’ gives way this week to a new trading symbol ‘TVIA.’

No doubt there is more than just a little hope in Terra Via’s boardroom that investors will forget the many troubled years trying to wring diesel fuel from algae.  According to the last annual report, Solazyme took in $585.7 million in equity capital to bankroll its algae-to-fuel tank business plan.  There is also $202.5 million in convertible debt that will need to be paid off or converted. Unfortunately, its operations reported $609.9 million in losses since inception, leaving the company with a $46.5 million deficit.  It is going to take quite a bit of fancy algal fudge to fill that gap.

Of course, there are numerous food products that could be developed based on nutritionally rich algae.  Algae is about 50% protein has about as much protein as rice or peas.  In September 2015, the company introduced an algae protein product called AlgaVia that contains 64% protein along with other good-for-you elements such as fiber and amino acids.  Microalgae are used to convert sugars into oils and proteins.  The mature microalgae are then harvested, washed, dried and milled into a fine powder.  The company touts the value of the powder for ready-to-drink beverages, sauces, or baked goods.  A cracker, for example, made with AlgaVia could have twice the amount of protein.

In early May 2016, TerraVia announced a deal with Bunge Ltd. (BG:  NYSE) to launch a line of sustainable specialty feed ingredients.  The joint venture is going after the aquaculture market first with a whole algae product called AlgaPrime DHA.  A supply agreement has already been worked out with a large aquaculture feed supplier, but Terra Via has kept quiet on the terms.  However, the company did suggest that the supplier would begin lacing its fish feed with AlgaPrime beginning yet in 2016.

Make no mistake TerraVia has not given up on commercial grade algal oils.  Unilever has chosen the company’s oils for its Lux soap.  Algal oils have great public relations value.  Unilever’s Lux is vegan and petroleum-free, providing Unilever with marketing value to reposition this time honored product.

TerraVia also has its own personal care product line.  The cosmetics retailer Sephora S.A. is distributing TerraVia’s Algenist line of anti-aging and color correcting products.  QVC with its multimedia marketing platform and ULTA Beauty stores also sell the Algenist line.
There is also a strong sustainability argument to make for tapping algae for use in the human and animal food complex.  The large quantities of land, water and fertilizer needed for field crops are unnecessary for algae cultivation.  Algae can be grown in what many call ‘reactors’ with a much smaller footprint than are required to harvest the equivalent amount of protein from grain crops.  (Personally, I hope edible algae producers come to their senses and change this name as well.  Who really wants to eat something from a reactor?)

The enthusiastic case for algae does not appear to have been a comfort for TerraVia investors disillusioned over the company’s continued losses.  The stock has steadily traded down from a 52-week high of $3.73 set in May 2015.  Of course, some shareholders might remember the company’s initial public offering in 2011, after which the stock traded up to an all-time high of $26.31. 

So far the Unilever deal may offer the most promise for significant revenue. TerraVia has agreed to supply at least 10,000 metric tons of algal oil for use in Unilever’s Lux soap and other personal care products.  Some have valued the supply deal at $200 million over the next few years.  The key to whether the shipments will generate a profit for TerraVia hinges on products yields.  TerraVia plans to produce the algal oil for Unilever in a facility in Brazil constructed jointly with Bunge Global Innovation next to Bunge’s sugar cane processing plant.  After beginning construction in 2012, the plant came on line in 2014 and reach full capacity in 2105.

Bunge provides the sugar-cane based sucrose for TerraVia’s hungry algae.  Corn feedstock might be an alternative.  Thus production costs for the company’s algal oils are likely to be highly dependent upon sugar and corn commodities.  Sugar prices have recovered from lows set in 2015, but still remain well below highs set in early 2011.  TerraVia’s production for Unilever may get off to good start with relatively economical sugar ‘feed’ for its algae.  Coupled with production of algae for the AlgalPrime DHA product that TerraVia is producing in another joint venture with Bunge, TerraVia may be moving nearer a profitable production level.

It is not likely that shareholders will be long distracted by name changes.  Solazyme or TerraVia.  Fuel or fudge.  Like always shareholders are looking for performance.  The next financial reports from TerraVia may need to offer clear evidence of commercial progress.

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.

May 12, 2016

Canadian Solar Boosts Outlook; Yingli Hopes For Sale

Doug Young

Bottom line: Canadian Solar’s raised revenue guidance hints at rising prices and could signal upside for the company’s profits, while YIngli’s latest signals may show it’s trying to sell itself to a healthier rival.

The strongest and weakest players from China’s lively solar panel sector are in the headlines today, with superstar Canadian Solar (Nasdaq: CSIQ) and the struggling YIngli (NYSE: YGE) both releasing their latest quarterly results. But whereas Canadian Solar has just announced its financials for this year’s first quarter, including a raised revenue outlook for 2016, Yingli is just now releasing its results for the fourth quarter of 2015.

Most companies typically release their quarterly results within 60 days of the quarter’s end, or 90 days at the very latest. But YIngli’s ongoing struggles have led managers to say several times the company could become insolvent, as it sits on a massive pile of maturing debt that it can’t repay. The latest of that debt comes due today, and Yingli is saying it’s unlikely to make the repayment on time.

We’ll return to YIngli later, but let’s begin with the more positive story of Canadian Solar, which is one of the best-run of China’s major solar panel makers and has managed to stay profitable despite difficult conditions in the global solar market. Canadian Solar wasn’t exempt from the ongoing stiff competition, and reported its revenue fell 16 percent in the first quarter to $721 million. (company announcement)

Eroding margins also caused the company’s net income to fall by more than half to $23 million, from $62 million last year. But in an encouraging sign, Canadian Solar raised its revenue guidance for 2016 to between $3 billion and $3.2 billion, versus previous guidance of $2.9 billion to $3.1 billion. At the same time, it kept its actual module shipments forecast unchanged, meaning it expects prices to be stronger than it initially anticipated.

Investors were quite excited by the outlook, with Canadian Solar shares rising 12.4 percent after the report’s release. Canadian Solar has found a strong formula for boosting sales by building solar power plants and then selling them to long-term owners after completion. It filed late last year to make a New York IPO for its plant-building unit, Recurrent Energy (previous post), though the plan appears to be on hold for unspecified reasons.

Looming Default

While the outlook is positive for Canadian Solar, the opposite has been true for Yingli. The company first warned last year that it faced the risk of insolvency, after rising to prominence on a business model that relied on selling low-tech panels at cheap prices. In its latest report Yingli posted a massive 5.6 billion yuan loss ($865 million) in last year’s fourth quarter, or about 4 times its loss a year earlier. (company announcement)

In one slightly encouraging sign, Yingli forecast its shipments this year will total 2.6 gigawatts to 3 gigawatts, representing an actual expansion from nearly 2.5 gigawatts for all of 2015. But the positive news ended there, and investors focused on the part of its report where Yingli discussed its looming default for 1.4 billion yuan worth of bonds that come due on May 12. The company also failed to repay 30 percent of a another 1 billion yuan bond that came due last October, meaning it now needs to find 1.7 billion yuan to repay its maturing debt.

In its latest report, Yingli repeats its previous assessment that it will be difficult for to repay either of the bonds by May 12, and adds it is in ongoing discussions with the bond holders. (English article) None of this is particularly unexpected, which is perhaps why YIngli shares only dropped a modest 1.2 percent after the report came out, giving it a tiny market value of about $60 million.

In a potentially interesting new development, Yingli says in that it is exploring various options that could include the introduction of new investors or lenders to help it repay the debt. That suggests that perhaps Yingli is trying to engineer a sale of itself to a healthier company, which would then take responsibility for negotiating for debt relief with its creditors.

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.

May 11, 2016

The Worst Waste

Jim Lane

Peter Brown of FFA Fuels, promotes his company these days with the pithy slogan, “Fuels from the Worst Waste Around.”

Which of course raises the legitimate question, what is the worst waste, and can we find a use for it?

Discussions of worst waste will usually focus on the obvious — say, landfill — or the odious — say, medical or nuclear waste. Toxicity and longevity are typical concerns, and that’s one of the reasons why nuclear energy remains controversial to this day.

No Waste in Nature

As LanzaTech’s Jennifer Holmgren observed in a recent article by Peter Forbes in Aeon:

“Carbon is precious. This means we must learn to recycle it. If you can extend its life by reusing it in a fuel, you will keep that equivalent amount of fossil fuel in the ground. There should be no waste. There is no waste in nature.’

Which introduces a new idea into the discussion of waste.

By wasting carbon as skyfill, says Holmgren — blasting it into the atmosphere after one use, instead of seeking to recycle — we condemn ourselves to extracting fresh supplies of carbon from their subterranean repositories.

It’s a one-and-done approach to carbon that has poured hundreds of millions of tons of CO2 into our atmosphere, and according to a scientific plurality, triggered a greenhouse climate effect that threatens our way of life.

One and done

Let’s apply the one-and-done habit to something different, but equally pervasive: housing. We all need energy and we all need shelter.

One and done housing, absurd? Not entirely. Roman troops used to build a wooden fort after every day of marching on the imperial frontiers, and abandon their lodgings in the morning as they set off for their next day’s destination. One and done, that was the legion’s way.

Today, if we threw away a house after every use, we’d run out of building materials in practically no time at all, landfills would be overflowing with waste, and the economy would be wrecked trying to handle all the new construction.

Yet, that’s our energy system, in a nutshell, aside from the small amount of production coming from renewables. We extract carbon from the ground, combust it, and release carbon into the atmosphere as skyfill. One and done.

Because it’s invisible — and, more importantly, because it’s up there instead of all around us — we tolerate skyfill. “For they have sown the wind, and they shall reap the whirlwind” as the prophet Hosea observed almost 3,000 years ago.

In almost no other major aspect of our lives do we tolerate one-and-done — we wash the clothes and dishes, lock and insure the house, clean the carpet and floors, polish the shoes, mulch the lawn clippings, serve leftovers, maintain the car, and have second dates and even move on to marriages with the objects of our desire. It is our nature to conserve resources.

But with plastics, and fuels, we have become invading Roman soldiers, one and done. Wham-bam-thank-you-ma’am.

Cheaper at the pump

We are told that the reason that this economic system endures, of energy use and carbon spewing, is that it is the most economic of all. That is to say, one-and-done, carbon-extraction, petroleum-based fuels are cheaper at the pump than alternatives.

To the extent that it is always more economically efficient to withdraw money from the bank than to earn a living and add value within the economy, that’s true.

So, why not simply squander the resources of a nation in an orgy of ATM withdrawals? Why not just live on our national savings, in all things and not just energy, until the savings run out? Is it not more economically efficient, is it not cheaper to do so, until the resource runs out and there’s hell to pay?

Sure it is.

But what’s the point of building a civilization on sand, even if it is valuable tar sand?

Resources that are not replenished will fall away eventually, and societies that have lost the habit of sustainable production will fall away even quicker than the resources beneath their feet. The orgy of life on the credit card is a fictitious life with a ruinous end — even if what is being spent on the credit card is carbon and not money. The money in the bank must eventually be replenished, or not used.

In Christian theology, of course, we’re spending not our own resources but the Almighty’s, as God pointed out via Leviticus 25: “the land is mine, for ye are strangers and sojourners with me.”

So, the worst waste?

Is the worst waste actually the most toxic and odious waste, like nuclear?

Or, rather, the one that tempts us to base our civilization on an energy version of a Ponzi scheme?

So, what’s the remedy to wanton waste and skyfill? Technologies that pick up waste carbon — preferably at the point of emission, before the carbon is dissipated into the atmosphere and ruinously expensive to recover. Waste carbon-gulping technologies from the likes of LanzaTech, Liquid Light, and algae project developers such as Sapphire Energy, Cellana and Heliae.

Carbon price and climate change cost

But here’s the problem. Skyfill is priced at ruinously low levels by markets.

Skyfill is dangerous to our economy and way of life, yet rescuers of industrial gases are expected to acquire unprocessed gas at costs between zero and $30 per ton. I have seen many thrillers but I have never seen the rescued parties charge for the privilege of saving them.

The Brookings Institute last year estimated that global GDP would be reduced by as much as 20 percent using business-as-usual approaches to carbon. That’s $15 trillion per year in today’s dollars. It’s worth trillions to prevent that. Yet, markets are aghast at the prospect of pitiful carbon prices.

Let’s think differently

We might start here: the duty to take reasonable care. That was something I learned as a young law student, sent to study up on negligence and the case of Donoghue v Stevenson.

In that decision, Lord Atkin wrote:

“You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.”

The reasonable person thus makes an appearance.

He is distinct from the “average man” or “the man in the street” and distinct, then, from the market itself. In the realm of negligence, we are bound by the duty to take care, even though in the realm of markets that is not always the case.

The power to ruin

In a market, I might trade you shares of a stock I think is overpriced, regardless of the ruin it might bring to you. So long as I do not have access to inside information, it means nothing to markets that you are exposed to loss. I have no market duty to take reasonable care to protect you from economic harm when I unload my shares to you.

In a market, an organization might take on a risky investment because it understands that it is “too big to fail” and that gains will be privatized but losses socialized, through bail-outs. That’s moral hazard.

Moral hazard — what’s that again?

It’s been defined as “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.”

Is that not a perfectly good way to look at the carbon debacle — as a case in moral hazard? Since most of us, the average of us, know that excessive use of carbon is a risky event that other parties (for example, fish, or future generations) and not us, will pay the price for.

So, we are using the concept of markets to govern behaviors that might better be governed by the concept of the duty of care, and the higher standard expected of the reasonable person. The ‘average man’ of the markets might risk moral hazard, but the reasonable person cannot.

Of the reasonable person, Percy Henry Winfield wrote:

“He will not anticipate folly in all its forms but he never puts out of consideration the teachings of experience and so will guard against negligence of others when experience shows such negligence to be common. He is a reasonable man but not a perfect citizen, nor a “paragon of circumspection.”

We have wasted the concept of the reasonable person, and the duty to take care — when it comes to the hazards posed by carbon. We have left carbon to the market, when we have taken so many things outside of the market that you could hardly write them all down.

We have made public drunkenness an offense despite the fair market transaction that took place between the buyer and seller of the alcohol that produced the condition. It is wrong to impose drunkenness or loutish behavior on society, despite the fact that the transaction that produced the condition was legal and took place at an agreed market price. The publican gets money, the customer gets a beverage, but society gets an intolerable disturbance.

The worst waste, then — perhaps we might well discover it to be a “great and ready remedy for a great societal ill, that we have refused to use”.

Why? A misplaced faith in the power of markets.

Markets are filled with items for sale that shouldn’t be. Sex, drugs, slaves, laundered currency, odious weapons, and stolen goods — to name a few. But they are black markets, because they are banned trades. Not because markets do not function but because they fail to afford the reasonable protection to society that the reasonable person has a duty to provide. Black markets fill our sewers with their unintended consequences and their moral hazard.

There’s no need to ban the trade in carbon, any more than banning the trade in alcohol. But unreasonable use, that is something to look at which markets never will.

Carbon use ought to be measured according to the standard of the reasonable person, rather than the person of the market whose only defense of the sale is that there was a buyer at the price.

We might find that the reasonable person takes better account of the problem of skyfill and sees a duty to take care by reducing carbon spewing through re-use. We might also find that pricing energy only because of the work that it does is like tolerating the drunken man howling at the top of his lungs in the middle of the night, on the theory that he should be freely allowed to enjoy his legally-bought goods in his own way.

His right to a good time, after paying a market price, is not the only priority for a society made up of reasonable people who would like to get some sleep.

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.

May 10, 2016

Chinese Green Subsidies: When Lifting All Boats Becomes Bailing Them Out

Doug Young

Bottom line: Strong response to Tesla’s latest EV in China and a major new solar plant plan from SolarReserve reflect Beijing’s strong promotion of new energy, which is also creating big waste by attracting unqualified companies to the sector.

A series of new reports is showing how Beijing’s strong support for new energy technologies is benefiting both domestic and foreign companies, as China tries to become a global leader in this emerging area. But the reports also spotlight the dangers that come with such aggressive support, which often leads to abuse of subsidies and other preferential policies that can lead to big waste and market distortions.

One of the reports centers on US new energy car superstar Tesla (Nasdaq: TSLA), and quotes an executive saying that China has become the second largest market for its newest and first relatively affordable electric vehicle (EV). The second report comes from the solar energy sector, and has US solar plant developer SolarReserve LLC in a major new partnership to build more than $2 billion worth of solar farms in China.

While both of those developments look positive, and reflect big government incentives on offer, the third news item highlights the darker side of Beijing’s largess. That story comes from leading financial news magazine Caixin, whose investigative report shows how many of China’s smaller automakers have become addicted to grants and other subsidies for new energy car development and rely on such money for their profits.

Let’s begin with the Tesla story, which comes as the company tries to gain some traction in China after a poor start 2 years ago. Following positive reviews and strong initial orders for its new Model 3, costing just $35,000, Tesla’s Asia chief Ren Yuxiang is saying in an interview that China has become the second largest market for pre-orders for the new car, presumably after only the US. (English article; Chinese article)

Ren didn’t give any figures, but Tesla previously said it had received 400,000 pre-orders for the Model 3, which won’t be available in China until sometime next year. One Chinese media report also points out that Tesla has said it is exploring setting up a manufacturing plant in China, and that local reports have indicated that plant would be in the city of Suzhou not far from Shanghai.

New Solar Power Plants

Next there’s the solar plant news, which comes in a report that says SolarReserve and local partner coal producer Shenhua (HKEx: 1088) will jointly spend up to 15 billion yuan ($2.3 billion) to develop solar farms in China. (English article) Projects developed by the pair could have up to 1,000 megawatts of capacity, which is quite a large amount.

We’ve seen many similar initiatives to build solar power plants in China in response to Beijing incentives and directives, but this is one of the largest I can recall involving a foreign company. That’s significant because many Chinese builders have little experience in the sector, and may be taking their action more to please the central government than to earn actual profits. By comparison, this new partnership should be far more commercially focused, giving it better chances of success.

Finally there’s the Caixin investigative report, which saw a reporter review many companies’ latest financial statements and uncover how reliant some smaller automakers have become on Beijing incentives to develop new energy cars. (Chinese article) The report points out that many of the companies would be loss-making if they didn’t have the government support.

I’ve never heard of any of the companies named in the report, which reflects the fact that China’s auto industry is highly fragmented with dozens of small players that would never survive in a more mature market. Many of these companies probably should have closed or merged by now due to stiff competition. But they have discovered that Beijing’s largess can prolong their lives for a few more years, as they develop new energy cars that will probably never make it to market.

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.

May 09, 2016

Right About Tesla, Wrong About Yingli

Doug Young 

Bottom line: Beijing should promote cutting-edge companies like Tesla that can help advance its new energy agenda, while abandoning ones like Yingli that use old technology to make cheap copycat products.

Two green energy stories were in the headlines last week, spotlighting China’s drive to become a global leader in the new technology and also the right and wrong ways to achieve that aim. An item involving US electric vehicle (EV) powerhouse Tesla (Nasdaq: TSLA) represented the right approach, with reports that the company might near a deal with Beijing to build a manufacturing plant in China. Meantime, former solar panel heavyweight Yingli (NYSE: YGE) was in the wrong approach column, announcing that its ill-conceived model of using old technology and cheap prices to do business had pushed it to the brink of insolvency, despite ongoing local efforts to rescue the company.

Beijing should take note of these 2 examples and do more to promote companies like Tesla that can develop cutting-edge technology for use in widely-respected products that the market wants. At the same time, it should abandon copycats like Yingli that don’t innovate and can only compete by offering cheap products using old technology.

In keeping with that approach, the government should finally pull the plug on companies like YIngli by letting them fail, while at the same time giving even bigger support to innovators like Tesla. Such a policy may cause some short-term pain due to plant closures, layoffs and lost investment for the copycats. But it will ultimately leave China with a field of healthier, more potent companies that can help it achieve its goal of becoming a global new energy leader.

China has made development of green industries a top priority over the last decade, with the aim of developing cutting-edge technologies that can be used both at home and exported abroad. That drive has gained added urgency in recent years as the nation grapples with worsening pollution, the result of years of breakneck growth with only minor attention to environmental protection.

One of Beijing’s earliest focus areas was the solar panel sector, whose products create pollution-free electricity using sunlight. Thanks to a wide range of incentives including tax reductions, cheap loans and low-cost land rights, the nation quickly built up a manufacturing complex that now produces more than half of the world’s solar panels.

Lack of Experience

But many companies that entered the field had little or no experience in the area, and instead relied mostly on cheap, older technology to produce low-end panels that were most attractive for their low prices. One of the biggest players to use that model was Yingli, whose cheap and relatively low-tech panels allowed it to quickly grow into the world’s largest solar panel maker.

But that strategy has sputtered due to a prolonged industry downturn created by too much capacity, and Yingli announced a year ago that it was running into serious financial difficulties. The company is now struggling to pay off its debt, and last week said there was “substantial doubt as to its ability to continue as a going concern” as it posted a loss of about 5.8 billion ($900 million) yuan last year. (company announcement)

While Yingli’s situation looked dire, things were much better for Tesla, which has previously said it would consider manufacturing its popular cutting-edge electric cars in China if given the right incentives. Tesla’s story was in the headlines late last week when its Asia chief Ren Yuxiang met with Xin Guobin, a vice minister from the Ministry of Industry and Information Technology (MIIT), which oversees the new energy auto sector. (Chinese article)

Both sides were eager to publicize the meeting, releasing photos of the men sitting together, heating up talk that the pair were closing in on a deal to build Tesla’s first manufacturing facility outside its home US market. Tesla’s ride into China hasn’t been easy mostly due to infrastructure and marketing issues, but its actual cars have been well received for their strong performance and cutting-edge technology. The company took a major step towards making its high-end products more affordable for average car buyers with the release last month of its latest car, the Model 3, which retails for a relatively affordable $35,000 before tax incentives.

Beijing should be commended for working hard to bring Tesla’s technology and manufacturing to China, which could ultimately help to promote similar development of China’s own domestic sector. At the same time, the government finally appears to be losing patience with Yingli after some quiet attempts to revive the company, and should work to conduct an orderly wind-down for this failed low-tech template for development in the fast-moving and fiercely competitive solar energy sector.

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.

May 08, 2016

Aemetis acquires Edeniq for $23.7M

Jim Lane

In California, Aemetis (AMTX) will acquire all of Edeniq’s outstanding shares in a stock plus cash merger transaction.

In 2015, Edeniq generated approximately $20 million in revenue and $6 million in positive EBITDA. Headquartered in Visalia, California, Edeniq has 30 employees working at advanced research and development facilities, as well as pilot plants funded through grants from the DOE and the California Energy Commission.

Under the terms of the agreement, Aemetis expects to issue between one and two million shares of its common stock (depending on whether Edeniq stockholders elect to receive part of their consideration in cash or stock) plus cash to be paid over the next 5 years in an amount of up to $20 million (up to $18 million if Edeniq stockholders elect all stock consideration) in exchange for all of the issued and outstanding shares of Edeniq.

Upon completion of the transaction, Edeniq will operate as a wholly-owned subsidiary of Aemetis. The closing of the transaction is expected to occur during the second quarter, and is subject to customary closing conditions and approvals, including the approval of Edeniq’s shareholders and the closing of financing by Aemetis to refinance certain liabilities of Edeniq that exist prior to closing.

Reaction from the stakeholders

“The acquisition of Edeniq will further Aemetis’ plan to lead the deployment of technology to transition traditional biofuels plants into the production of valuable advanced biofuels, upgrading the existing infrastructure found at the 210 ethanol production facilities operating throughout the United States,” said Eric McAfee, Chairman and CEO of Aemetis, Inc. “Edeniq has commercially deployed its patented cellulosic ethanol technology at a number of leading US ethanol companies, and coupled with Aemetis’ extensive biorefinery operating expertise, we expect to enhance this technology to expand cellulosic feedstocks and to increase yields. We believe Edeniq’s technology offers compelling advantages to existing ethanol operators to increase profitability without purchasing additional feedstock,” added McAfee.

“We believe that joining with Aemetis will enable Edeniq to accelerate the deployment of the Pathway technology to the ethanol industry,” said Brian Thome, President and CEO of Edeniq. “The Edeniq team is also excited to be able to work day-to-day alongside the Aemetis team to enhance our technology through optimization and innovation at the Aemetis ethanol plant.”

The Digest’s Take

Well, Aemetis clearly is seeing the same opportunities we saw in our profile earlier this week “How to make $250M in cellulosic biofuels with an investment under $6M“.

We’ll see how the market looks at the deal tomorrow — to some extent, depends how much debt is on Edeniq’s balance sheet, and what their cash position was. But no doubt about it, Edeniq has been on a customer roll of late, and for Aemetis to pick up $6M in positive EBITDA for $23M, of which the cash is paid out over 5 years and is performance-based — well, in normal business conditions, that’s a complete home run for Aemetis shareholders. The deal, on the surface, self-finances.

Note the caveat that Aemetis has to “refinance certain liabilities of Edeniq that exist prior to closing”. Looks like Aemetis CEO Eric McAfee will need to hustle a whole stack of EB-5 investments in the near future.

In turn, Edeniq picks up a stronger capital structure for its expansion, and locks in a commercial-scale customer. Already, Flint Hills, Pacific Ethanol have also licensed the tech. We like the deal, an awful lot.

The True Hollywood Backstory

We profiled Edeniq’s technology earlier this week in this Multi-Slide Guide.

Edeniq: The Digest’s 5-Minute Guide.

Aemetis: From First-Gen to Advanced: The Digest’s 2016 8-Slide Guide to Aemetis

Aemetis: The Digest’s 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.

May 06, 2016

The BioEconomy Earnings Season Roundup: REGI, GPRE, BIOA, ADM

Jim Lane

Q1 earnings season for the advanced bioeconomy kicked off this week, with reporting from Green Plains, ADM, REG, and BioAmber. That’s an ag giant, an ethanol monster, a biomass-based diesel dominator and a fast-upcoming renewable chemicals maker. Between the four, we have a good opportunity to check the sector’s health.

Overall, markets were unhappy today, knocking down BioAmber 10 percent, while Green Plans took a 6 percent tumble, and REG and ADM were both down, though by lesser amounts. The oil price environment, not pretty today, provided most of that shareholder joy.

The Digest’s Take

Ethanol, challenging times. Biodiesel is looking strong with gallons up, prices not far off and margins improving. Renewable chemicals look good in terms of pricing, production is ramping up at BioAmber and sales jumped 31% QonQ.

Green Plains (GPRE): Ethanol margins weak, cash position strong, 2016 looking better.

Green Plains reported a net loss of $24.1 million, compared with net loss of $3.3 million for Q1 2015 — this, on revenues of $749.2 million for Q1 2016 compared with $738.4 million for Q1 2015.

Production. Green Plains produced 247.0 million gallons of ethanol compared with 232.5 million gallons for Q1 2015.

EBITDA: Q1 earnings before interest, income taxes, depreciation and amortization for Q1 was 2016 was -$5.8 million compared to $19.2 million for Q1 2015.

Cash and debt: As of March 31, Green Plains had $400.7 million in cash and cash equivalents, and $146.6 million available under revolving credit agreements. Total debt outstanding was $776.6 million.

Crush margin. The consolidated ethanol crush margin was $0.5 million, or $0.00 per gallon, for Q1 2016 compared with $14.9 million, or $0.06 per gallon, for Q1 2015. The consolidated ethanol crush margin is the ethanol production segment’s operating income before depreciation and amortization, which includes corn oil production, plus inter-company storage, transportation and other fees.

Navigating rough waters. “The margin environment remained weak, providing little opportunity to generate a profit in the first quarter,” said Green Plains CEO Todd Becker. “We focused on maintaining our strong liquidity position to remain well-positioned, not only during this cyclical downturn, but also for future growth opportunities within our supply chain.

Marketing & distribution guidance remains intact. Green Plains noted: “Our marketing and distribution segment reported an operating loss for the quarter which was primarily related to the valuation of inventories held for forward business that is fully hedged. We anticipate the profits on these positions will be realized over the remainder of this year and operating income for the marketing and distribution segment will remain in the $25 to $30 million range for fiscal 2016.”

2016 environment improving. “The forward ethanol margin environment has improved since the beginning of the second quarter and we have hedged a portion of our future production,” said Becker. “We believe the ongoing growth in global and domestic ethanol blending will continue to drive better market fundamentals for the industry and are optimistic the margin environment will improve during the balance of 2016.”

Over at Green Plains Partners, “Our business model, which includes minimum volume commitments, insulated the partnership from challenging market conditions and provided cash flow stability that enabled us to increase our distributions for the second consecutive quarter,” said Becker. “We expect a recovery in volumes during the remainder of the year as our sponsor continues to ramp production back up at its ethanol plants.”

GPP income and cash. First quarter 2016 net income for GPP was $12.2 million on adjusted EBITDA of $13.9 million and distributable cash flow of $13.3 million. GPP had $5.6 million in cash and cash equivalents, and $49.0 million available under the partnership’s revolving credit facility. On January 1, 2016, the partnership acquired certain ethanol storage and leased railcar assets located in Hereford, Texas and Hopewell, Virginia from Green Plains Inc. for $62.3 million. The transaction was financed using the partnership’s revolving credit facility and cash on hand.

ADM (ADM): “Challenging market conditions,” sees “opportunities in 2nd Half”

In Illinois, Archer Daniels Midland reported operating profit was $573 million, down 36 percent from $892 million for Q1 2015. Net earnings for the quarter were $230 million.

Agricultural Services decreased $118 million compared to a strong quarter last year amid lower North American export volumes and margins, fewer global merchandising and transportation opportunities, as well as unfavorable Global Trade Desk merchandising positions.

Corn Processing increased $2 million as strong results for sweeteners and starches were offset by weaker lysine results and lower ethanol margins. Sweeteners and starches results improved $56 million to $141 million as the business continued to perform well, with an improved cost environment driven by strong capacity utilization. Bioproducts results were down from $42 million to a loss of $12 million, due primarily to the continued challenging conditions in the global lysine market. In addition, ethanol margins continue to be impacted by high industry production levels that caused inventories to build throughout the quarter.

Oilseeds Processing decreased $231 million compared to a very strong year-ago period, as higher Argentine crush run rates weakened global margins. Crushing and origination operating profit of $120 million declined $214 million from last year’s high levels. Global soybean crush and origination results were down significantly due to lower global margins resulting from increased Argentine soy meal exports and significantly reduced U.S. meal exports. In addition, lower softseed crush volumes and weaker Brazilian commercialization, which slowed throughout the quarter, negatively impacted results.

WILD Flavors and Specialty Ingredients earned $70 million on solid performance from WILD Flavors and higher results from specialty ingredients.

South America on the mend? ““Challenging market conditions continued in the first quarter, particularly affecting Ag Services. The first half of the year continues to present a challenging environment,” said CEO Juan Luciano. “However, we are cautiously optimistic that reduced South American soybean and corn production could bring improved soybean crush margins and merchandising opportunities in the second half of the year.”

Acquisitions. ADM acquired a controlling stake in Harvest Innovations — enhancing ADM’s plant protein, gluten-free ingredient portfolio. The company also purchased a corn wet mill in Morocco to expand the global sweeteners footprint.

Divestments. ADM reached an agreement to sell our Brazilian sugarcane ethanol operations.

BioAmber (BIOA): “February problem” now overcome; 31% QonQ uptick in sales, and “ASP unchanged despite lower oil prices.”

In Canada, BioAmber announced Q1 revenues of $1.5 million, an increase of 297% over Q1 2015 and up 31% over Q4 2015. The increase in revenue was driven by volume growth in product sales. Gross loss for the quarter ended March 31, 2016 was $1.6 million , compared to a gross profit of $57,000 for the same period last year. The loss was due to higher cost of goods sold resulting from Sarnia fixed costs and off-spec product reprocessing costs that were allocated to the cost of goods sold.

The Company recorded a net Q1 loss of $10.9 million compared to a net Q4 2015 loss of $8.4 million.

Production. Plant up-time averaging 70% in the last three weeks of the quarter; fermentation continued to meet targets for productivity, sugar yield and final concentration. The company disclosed “a production problem in February,” but said that “plant uptime and percentage of off-spec product improved significantly, reaching target levels in recent weeks”.

Pricing. The average selling price was unchanged from the previous quarter, despite lower oil prices.

Cash picture. Cash on hand was $14.1 million as of March 31, 2016 ;

Reaction from Fortress BioAmber: “We are making steady progress in ramping up Sarnia , from both a production and a sales perspective. Our transition to an operating company is complete and we are focused on reaching full production capacity and selling the output of the plant,” said CEO Jean-Francois Huc. “As we ramp up, the macro environment in which we operate is beginning to improve and higher oil prices could lead to greater demand for biobased products in the second half of the year,” he added.

REG (REGI): “Significant increase” in gallons sold, “better margin environment,” and “a more stable regulatory environment.”

In Iowa, Renewable Energy Group announced Q1 revenues of $305.6M on 98.0 million gallons of fuel sold, a gain of 63.7% in gallons sold compared to Q1 2015. Adjusted EBITDA for the quarter was $9.9 million compared to negative $30.2 million in the prior year period, without any adjustments for the 2015 Biodiesel Mixture Excise Tax Credit (BTC). Adjusted EBITDA for the first quarter of 2015, after giving effect to the retroactive reinstatement of the BTC, was negative $14.5 million.

Profits: The increase in gross profit was due to the significant increase in gallons sold along with a better margin environment. Gross profit was $25.1 million, or 8.2% of revenues, compared to gross Q1 2015 loss of $16.2 million, or 7.0% of revenues.

Production: REG produced 86.2 million gallons of biomass-based diesel during the quarter, a 42.1% increase.

Prices: The average price per gallon sold of biomass-based diesel decreased by 7.9% to $2.92 which was due to lower heating oil and RIN prices.

Cash: At March 31, 2016, REG had cash and cash equivalents of $164.1 million, an increase of $117.0 million from the prior quarter end. This increase was largely the result of collections related to the retroactive reinstatement for 2015 of the biodiesel mixture excise tax credit.

Reaction from Fortress REG: ”The REG team delivered solid execution in the quarter. We continued optimizing our fleet of plants while integrating our newest biorefinery in DeForest, Wisconsin and bringing REG Geismar back online,” said REG President and CEO Daniel J. Oh. “A more stable regulatory environment in the U.S. enabled us to focus on growing our business.”

Upcoming earnings seasons highlights

Pacific Ethanol, May 4
TerraVia, May 4
Codexis, May 9
Amyris, May 10
Biox, May 10
Dyadic, May 12
Evogene, May 19

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.

May 02, 2016

Ten Clean Energy Stocks For 2016 Spring Forward

Tom Konrad CFA

March and April were months of recovery for the broad market and for clean energy income stocks, but most clean energy stocks failed to participate in the rally.  By design, my Ten Clean Energy Stocks for 2016 model portfolio is heavily weighted towards income, recovering 9% in March and 6% in April so that it is now back in the black, up 0.8% year to date.  This puts it ahead of its benchmark, which is down 0.8% through the end of April.

I want to thank Aurelien Windenberger for stepping in with an interim update, now that I've switched to only writing these every other month.  While he does not follow all 10 stocks closely himself, he does follow many of them, and his comments on Terraform Global were particularly timely.  I hope they allowed some readers to scoop up shares of the stock I called one of the most compelling speculations I've seen in a long time when it was trading below $2.50.

I also hope readers paid attention at the start of March when I took the risk of making what may be the most bullish public call I've ever written:
In my decade and a half watching the stock markets, I have only seen as many compelling buying opportunities as I see today at the start of 2009. ...

I'm excited about most of the stocks on this list at their current prices, but Pattern (PEGI) and MiX Telematics (MIXT) all stand out as screaming bargains, while Terraform Global (GLBL) is one of the most compelling speculations I've seen in a very long time.

I can't say this enough: If readers have any cash still on the sidelines in this market, now is the time to buy.  Buy and keep reinvesting the extremely high dividends on offer until prices rise. 
I was cautious about when a rebound might happen, but said that the high dividend yields available from most of these stocks would more than compensate for the wait.  As it was, there was no wait (except for Terraform Global, where the wait was just a month.)  For the two months since the call, Pattern is up 26%, and MiX is up 18%.  The whole list, as well as the market in general (with the exception of clean energy growth stocks) did well, too.

Growth Stocks

Clean energy growth stocks fared less well.  My benchmark, the Powershares Wilderhill Clean Energy ETF (NASD: PBW), was up only 1.3% over the two months, and remains down 12.8% for the year.  My three growth picks did better, up 12.0% over two months, but remain down 7.2% for the year through April as well.

Income stocks did better, with Global X YieldCo Index ETF (NASD:YLCO) up 14.8% for two months, and 4.4% year to date.  My seven income picks recovered slightly more (16.5%) from a worse starting point to end April up 4.3%.  The Green Global Equity Income Portfolio, which I manage, also rose substantially (13.3%) over two months and is now up a solid 7.9% for the 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. 
4/29/16 Price:  $21.00.  YTD Dividend: $0.381.  Forward Annual Dividend:$1.524 (7.3%) YTD Total Return: 2.4%

Wind Yieldco Pattern Energy's recent advance makes far more sense to me than its decline at the start of the year.  There was not any significant news in April, but the stock continued the advance it began in March.

Pattern will release first quarter results before the market opens on May 9th.

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. 
4/29/16 Price:  $22.71.  YTD Dividend: $0.46  Forward Annual Dividend: $2.10 (9.2%) YTD Total Return: 9.4%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners, unlike almost all the mainstream Yieldcos, is once again trading above its $22 IPO price.  This should allow new secondary offerings of stock and enable additional drop-downs of new wood pellet facilities from its private sponsor.  Such drop downs would likely allow Enviva to exceed its 2016 guidance for $271 to $2.87 of distributable cash flow and $2.10 of distributions per unit.

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. 
4/29/16 Price:  $14.35.  YTD Dividend: $0.4025.  Forward Annual Dividend: $1.62 (11.3%) YTD Total Return: -8.9%

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. 

With the oil price starting to recover, GPP's share price has begun to recover as well. 

On April 21st, Green Plains Partners again increased its quarterly distribution slightly, to $0.405 per share, payable to unitholders of record on May 6th.

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. 
4/29/16 Price:  $15.13.  YTD Dividend: $0.225.  Forward Annual Dividend: $0.925 (6.1%) YTD Total Return: -9.4%

Yieldco NRG Yield (NYLD and NYLD/A) has also been recovering nicely.  I believe this is partly due to the general recovery of the sector, and partly due to growing confidence that the Yieldco still has the support of its sponsor, NRG. 

The company will report its first quarter results on May 5th.

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. 
4/29/16 Price:  $2.91.  YTD Dividend: $0.275.  Forward Annual Dividend: $1.10 (37.8%). YTD Total Return: -41.9%

Yieldco Terraform Global's sponsor, SunEdison (SUNE), finally entered bankruptcy protection in June. Speculation abounds as to if it and its sister Yieldco, Terraform Power (TERP), might be drawn into a SunEdison bankruptcy, but I believe that the debtor-in-posession nature of the bankruptcy makes the chances of this already unlikely scenario even more remote.

On April 21th, both Terraforms named Peter Blackmore as interim CEO, to replace the former CFO of SunEdison, who had been serving in that role.  Blackmore was previously head for the Yieldcos' conflicts committees, and was previously unaffiliated with SunEdison.  Such steps to develop in-house management are part of the Yieldcos' moves to establish themselves as truly independent companies.  They also needs develop their own internal accounting- the reliance on SunEdison means that neither has yet filed its 2015 annual report, let alone their first quarter results.

Some of Terraform Global's contracts allow for termination in a SunEdison bankruptcy, and I believe that fear of such terminations is keeping investors away from the stock.  Even if such contracts are terminated, the termination does not erase the value of the power from its solar farms.  Some power purchasers may have the ability to renegotiate contracts with Terraform Global, but the market seems to be treating the company as if those renegotiations will lead to an end of payments.  That will not happen if the customers need the energy, which they do.  All these PPAs are recent, and were entered into by utilities that wanted to purchase the power.

Terraform also has a dispute with SunEdison over the purchase of 425 MW of Indian solar farms which now may never be completed.  SunEdison's bankruptcy throws into question what sort of compensation the Yeildco will receive for its down payments, but some such compensation is likely to be in order.

In summary, the situation at Terraform Global is mostly unknowns, but the company is belatedly making the right moves to distance itself from SunEdison.  The question for investors is, how much of the cash raised in the $15 per share IPO is owned by Terraform Global, either as cash, or as operating projects with buyers for the power.  While this is likely less than the $7.40 book value per share reported at the end of September, 2015, it's also likely far more than the current $2.91 share price.  Abengoa (soon to be Atlantica) Yield (ABY) is much farther along the path towards distancing itself from its (nearly) bankrupt sponsor, Abengoa.  ABY trades at approximately book value.

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. 
4/29/16 Price:  $19.40.  YTD Dividend: $0.30.  Forward Annual Dividend: $1.24  (6.2%). YTD Total Return: 4.1%

Clean energy financier and REIT Hannon Armstrong rang the closing bell at the New York Stock Exchange to celebrate Earth Day.  The fact that I bother to mention this is testament to the lack of any substantial news since the last update.  First quarter results will be announced on May 4th.

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. 
4/29/16 Price:  C$12.38.  YTD Dividend: C$0.293  Forward Annual Dividend: C$0.88 (7.1%) YTD Total Return (US$): 35.3%

TransAlta Renewables continues to be one of the strongest performers among Yieldcos, helped in part by the rising Canadian dollar, and partly by its continuing ability to tap the capital markets to fund further acquisitions.  The company reported its first quarter results on April 28th, with cash available for distribution per share growing 32% to C$0.37 from C$0.28 a year earlier, while dividends per share increased 16% to C$0.22.  This leaves plenty of room for the Yieldco to invest in new projects or raise the already generous dividend further.

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. 
4/29/16 Price:  $9.72.    YTD Total Return: -4.6%

Advanced biofuel producer Renewable Energy Group (REG) benefits from both national and regional incentives which already give robust support to the biodiesel market and are likely to lead to a biodiesel boom in 2016 and beyond.  REG is poised to be one of the primary beneficiaries of this boom.

Iowa's House and Senate agreed to expand and extend state incentives in April, which will only add fuel to the fire when they are signed into law.

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.
4/29/16 Price:  $4.08 / R2.30.  YTD Dividend: R0.02/$0.12  Forward Annual Dividend: R0.08 (3.6%)  YTD Total Return: -2.5%

Software as a service fleet management provider MiX Telematics continued to recover from its lows along with the oil price.  Fuel savings make MiX's solutions quickly pay for themselves, but in the current low fuel price environment, MiX is working to emphasize another substantial advantage of its services.  The company just launched an extended Hours of Service solution to help fleet managers improve safety by managing driving hours.

The company will announce its full year results for the twelve months ending March 31st before the market opens on May 26th.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
4/29/16 Price:  $4.47.  YTD Total Return: -23.7%

Energy service contractor Ameresco has been a consistent under-performer in this list.  This has mostly been the result of management under performance which the company is paying for in terms of poor results: A large Canadian contract outside their core business which they bid too aggressively for, and the acquisition of a energy monitoring software business which did not produced the results that they had hoped for. 

Low energy prices have also payed their part, something to be expected in a business that helps customers cut their energy bills, but I am beginning to wonder if this company's long term under performance has more to do with weak management than a cyclical downturn, as I previously believed. 

The company will also announce first quarter results on May 5th.  If a positive surprise sends the stock up significantly, I may take the opportunity to exit.  I love the company's core business of saving customers money through energy efficiency, but the company has failed for years to make that business as profitable as I hoped it would be.

Final Thoughts

Two months ago, I used this space to urge readers to buy, both because the market seemed generally undervalued, and also because of specific stocks which seemed (and proved to be) incredible bargains.  After gains for roughly 15%, I still think many of these stock are cheap, but I am slightly more cautious.  My favorite picks are currently Terraform Global and Green Plains Partners, which might be good places to redeploy cash when rebalancing other winners.

Long-term followers of this list are likely to have significant cash to deploy in the near future, since the buyout of Capstone Infrastructure (TSX:CSE, OTC:MCQPF) closed on Friday.  I recommended Capstone in 2014 at C$3.55 and again in 2015 at C$3.20.  The buyout by iCON Infrastructure Partners was for C$4.90, plus C$0.67 in dividends for 2014 buyers (a total 57% gain), and C$0.37 for buyers in 2015 (a 65% total gain).  These gains are somewhat offset by the 15% decline in the Canadian dollar since the start of 2014, and its 3% decline since the start of 2015.

Long term pick New Flyer (TSX:NFI, OTC:NFYEF) has also reached levels that have had me sell a significant portion of my stake both for rebalancing and because the high price has reduced its dividend yield below 2%.  When I confidently wrote that the shares were "worth at least C$12.26" in 2011 (they were trading for C$7.66) I never imagined I'd be selling for C$37 five years later.  I just like undervalued green companies with 8% dividend yields.  Who doesn't?


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.

May 01, 2016

First Solar's Surprising Strategy Switch

by Paula Mints

CdTe and crystalline manufacturer and project developer First Solar (FSLR) announced positive results for Q1 as well as a switch in strategy emphasis from deployment to module sales.

Honestly, revenues, positive net income and other financial metrics matter less in this case than the company’s strategy switch to module sales. Downward price pressure and margin compression along with continued aggressive pricing from China makes this move confusing. Cost leadership is mutable in the PV industry and it is difficult to imagine that First Solar will have an advantage in this regard for long.

First Solar has a history of abrupt strategy changes, typically with successful results. In the mid to late 2000s, when demand in Europe was at its peak, the company shut down module sales to the US and other countries and focused on sales into Europe. As demand in Europe slowed First Solar switched its strategy to projects, selling almost all of its module product to its systems division. Now, with continued margin compression, aggressive pricing and a seemingly stable utility scale market in the US the company switches back to a focus on module sales.

Lesson: Companies in all industries make decisions that lead to head scratching moments for observers. When a company with a strong and leading project business makes a dramatic strategic switch observers should ask themselves what the company sees happening to its project pipeline. Another equally important question is what is happening to the company’s project margins. Given traditional low bidding on PPAs and tenders, the answer may be: Get out while you can.

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.

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