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December 28, 2016

What Just Happened: SunPower Struggles And Restructures

2016 was a wild year and not just for solar and after decades of reliance on government incentives, subsidies and mandates the global solar industry may be inured to unpredictability but the industry as a whole should be wary of global trends.  Solar PV expert Paula Mints looked at a number of the developments for solar companies in the December edition of  SPV Market Research's Solar Flare.  Adapted for AltEnergyStocks.com, this series of articles is reprinted with permission.

The high efficiency monocrystalline cell pioneer and manufacturer SunPower (SPWR) began signaling its competitive struggle in early 2016 and over the course of the year it shifted its focus from utility scale (a sector in which it is not cost competitive) to rooftop deployment (a sector in which it is still not cost competitive), shuttered module assembly in the Philippines and laid off 1200 people, and acquired JV partner AUO’s stake in the 800-MWp cell manufacturing facility in Malaysia for $170-million paid over four years.

In December SunPower announced that it would shutter 700-MWp of its cell capacity in the Philippines and lay off an additional 2500 people. The cuts were attributed to cost cutting measures. During an interview with Reuters, SunPower’s CEO said: "We are planning for (price) stability, meaning they won't materially decrease or impair. They might be plus or minus a few percent, maybe 5 percent, on a high side 10 percent, so we expect stabilization, not necessarily price increase."

Translated the quote means that prices are un-competitively low and we fervently hope that they will not continue to fall and though we do not expect prices to increase and we frankly have no idea what stabilization means at this point.

What it means for solar: As the robot said repeatedly on the 1960’s TV show Lost in Space: Danger Will Robinson. SunPower’s struggles in 2016, and earlier, indicate that high quality may no longer command a premium. As with First Solar, SunPower finds itself in a situation where visibility into future market direction is clear (price pressure will continue) and where an appropriate strategy has yet to emerge.

As with First Solar (FSLR), solar industry participants should hope that this industry pioneer and respected high efficiency manufacturer rights the ship.

Previous articles:

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

December 27, 2016

What Just Happened: First Solar's Strategy Shifts

2016 was a wild year and not just for solar and after decades of reliance on government incentives, subsidies and mandates the global solar industry may be inured to unpredictability but the industry as a whole should be wary of global trends.  Solar PV expert Paula Mints looked at a number of the developments for solar companies in the December edition of  SPV Market Research's Solar Flare.  Adapted for AltEnergyStocks.com, this series of articles is reprinted with permission.

Though First Solar (FSLR) indicated recently that 2017 would be a transition year there is no indication from the company’s behavior in 2016 that it knows where it is going.

The company has been restructuring since Q1 2016. Early in the year it pulled the plug on TetraSun, shifted focus from its EPC and its O&M businesses to a new strategic focus on module sales and community solar deployment. Recently it leapfrogged over its Series 5 module, which it showcased at the 2016 Solar Power International Trade Show, scrapping it to instead launch its Series 6 module. The company also an-nounced 1600 layoffs.

What this means for solar: Pardon the pun but First Solar would not be the first solar company to fail to read the market and stumble strategically.

It is easy to step back and suggest that a focus on module sales in an industry with historically painful price pressure is a mistake and to applaud an implicit admission that expansion via acquisition into crystalline may have been an unnecessary loss of focus from its core technology, CdTe.
The global solar industry is brutally competitive internally – and this is before the competitive effect of cheap natural gas is thrown into the mix. Solar industry participants should hope that this industry pioneer and largest thin film manufacturer globally rights the ship.

Previous articles:

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

December 26, 2016

What Just Happened: Solar Module Prices Drop To New Lows

2016 was a wild year and not just for solar and after decades of reliance on government incentives, subsidies and mandates the global solar industry may be inured to unpredictability but the industry as a whole should be wary of global trends.  Solar PV expert Paula Mints looked at a number of the developments for solar companies in the December edition of  SPV Market Research's Solar Flare.  Adapted for AltEnergyStocks.com, this series of articles is reprinted with permission.

module prices through 2016.png

Over 60% of global PV cell and module manu-facturing is either in China or owned by Chinese manufacturers. At ~30-GWp China’s market for PV deployment is over 44% of global demand.

A parable of what happened to module prices in 2016 is as follows: A company has one primary customer. This customer buys close to 50% of the company’s product. The customer cuts its demand for the company’s product suddenly also indicating that demand the following year will be 50% of its previous level. Suddenly demand for the company’s product has fallen by 50% with the promise of a further significant decrease in demand the following year. The company has several choices: A) sit on inventory, B) find new customers to absorb the excess production, C) sell the product at a sig-nificant discount and reduce capacity to serve the current level of demand or D) all of the above.

Late in 2016 China’s government moved to control demand and several gigawatts of product flooded into the market at historically low prices. Manufacturers outside of China and some Chinese manufacturers reduced staff. The rapid drop in price was, as usual, celebrated by some as an example of progress. The chart above offers average module prices (ASPs) from 2006 through 2016 as well as the low and high module prices during 2016.

What it means for solar: Prices have already ticked up slightly but full price recovery depends on another record year for solar PV deployment in China. Meanwhile other manufacturers face some tough decisions concerning pricing strategy for 2017. It’s a bad time to be a PV cell and module manufacturer.

Previous articles:

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.

December 23, 2016

What Just Happened: Chinese Solar-Boom or Bubble?

2016 was a wild year and not just for solar and after decades of reliance on government incentives, subsidies and mandates the global solar industry may be inured to unpredictability but the industry as a whole should be wary of global trends.  Solar PV expert Paula Mints looked at a number of the developments for solar companies in the December edition of  SPV Market Research's Solar Flare.  Adapted for AltEnergyStocks.com, this series of articles is reprinted with permission.

China’s 2016 market for solar deployment soars to near 30-GWp: Solar PV deployment in China ballooned in 2016 to double the goals of its government and make no mistake, globally solar deployment in 2016 would be 15-GWp lower if developers in China had not continued installing systems.

China serves as a perfect example of how the solar industry has behaved for decades. Developers in China have not been paid the FiT regularly, curtailment is high and yet developers (while complaining of unprofitability) continued installing systems. This is, again, a perfect example of solar industry behavior for decades. It is illogical and trying to understand why an entire industry would continue to act against its own self-interest could make a logical person’s head explode.

Solar industry participants – globally – should pay close attention to China’s economy. Recently the country’s bond market popped, debt is high leaving banks and companies vulnerable and the country’s shadow (grey) banking is close to out-of-control.
What it means for solar: The solar industry once again finds itself vulnerable to one big market much as in the mid to late 2000s when Europe consumed over 80% of module product. The excess of activity in China could come to an abrupt halt leaving the in-dustry overcapacity and desperate for a new multi-gigawatt market.

It is not too late for the solar industry to change. Growth for unprofitable growth’s sake is not healthy. Some business is not worth doing.

Previous article: SunEdison, First Solar, and SolarCity

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.

December 22, 2016

What Just Happened: SunEdison, First Solar, and SolarCity

2016 was a wild year and not just for solar and after decades of reliance on government incentives, subsidies and mandates the global solar industry may be inured to unpredictability but the industry as a whole should be wary of global trends.  Solar PV expert Paula Mints looked at a number of the developments for solar companies in the December edition of  SPV Market Research's Solar Flare.  Adapted for AltEnergyStocks.com, this series of articles is reprinted with permission.

In 2015 SunEdison (SUNEQ) was still buying up companies, developing projects, sponsoring conferences and was viewed – though skeptically by some – as an industry leader. Now pieces of the company, including projects in various stages of development, are available for pennies on the dollar.

What it means for solar: For developers and investors looking for a good buy there is a lot available at, again, pennies on the dollar. Not all of SunEdison’s orphaned projects will be developed, and not all will be developed by the buying company, but many will be developed and at the bargain they were acquired may even be profitable.

SunEdison’s failure, one of poor executive decision making and lax, poor oversight, cast good people adrift. Most will find their way back to solar jobs and some will not. The true victims of the SunEdison debacle were its own employees.

SolarCity and Tesla (TSLA) merge their debts and companies.

No one should have doubted that Mr. Musk would prevail in the merger of one highly flawed business model and two highly leveraged companies. A SolarCity failure would have had repercussions far beyond those of SunEdison as employees and residential lessees and PPA holders would have been affected. This is not reason enough to cheer bad business, but it is something salvaged.

What it means for solar: As with Tesla’s non-announcement about its non-existent solar roof tiles and its non-enforceable MOU with Panasonic Solar, expect a lot of PR an-nouncements about upcoming product releases as well as a lot of slipped release dates. All this marriage of debt means for solar right now is, basically, nothing.

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.

December 20, 2016

BioAmber Launching Asian Joint Venture

Amber Waves of Gain

In South Korea, BioAmber (BIOA) and CJ CheilJedang Corporation signed a LOI for a joint venture in China to produce up to 36,000 metric tons of bio-succinic acid per year.

It’s not a greenfield. The CJCJ JV involves a retrofit of an existing fermentation plant in a market that BioAmber cannot readily penetrate today.

How is BioAmber able to convert this plant? It comes down to a low pH yeast, which allows us to leverage CJCJ’s existing fermenters and purification equipment. The retrofit will allow the partners to bring this capacity on line quickly, cost effectively and with no capital investment by BIOA.

The goal is to competitively produce bio-succinic acid in China and quickly penetrate the world’s largest succinic acid market. This can be achieved rapidly, cost effectively and with limited capital investment by retrofitting an existing CJCJ fermentation facility with BioAmber’s succinic acid technology. CJCJ would incur all capital costs required to retrofit their fermentation facility, including the capital needed during plant commissioning and startup, and production would begin in Q1 2018. If market demand were to subsequently exceed production capacity, the joint venture could expand production through debottlenecking and/or additional investment. The partners would also have a mutual right-of-first-refusal to retrofit additional CJCJ fermentation facilities globally.

The CJCJ background

CJCJ produces fermentation-based products such as feed amino acids, monosodium glutamate and nucleotides, with global manufacturing and business operations in six continents.

CJCJ would own 65% of the JV and BioAmber would own 35%. The JV would pay BioAmber a technology royalty for having access to BioAmber’s proven bio-succinic acid technology, and would pay CJCJ a tolling fee for producing bio-succinic acid on behalf of the JV. Both partners would be entitled to a share of the profits equal to their respective equity ownership positions.

The BioAmber strategy

Clearly, opportunities for BioAmber continue to emerge and the CJ announcement is a great example of this. A large commercial plant operating in Sarnia enables BioAmber to demonstrate that our technology and our cost of goods are compelling. This is attracting large strategic players who recognize the long term value of our innovative, disruptive biotechnology platform.

As we noted in our 2014 report: Why are all the traffic lights turning green for BioAmber?

“BioAmber is avowedly pursuing a strategy based in careful aggregation of strategic partners that bring investment and offtake as well as financing relationships, while building further applications for their molecules in work with R&D partners that could be expected to translate into commercial partners down the line. Which is to say, starting with an economically and environmentally advantaged molecule and then working in partnership with downstream customers to establish markets for that molecule.

“It’s very different than the conventional biobased fuels strategy, which has been to set mandates to create market certainty, and use that to create a favorable financing environment, and encourage engagement with incumbents.”

How it all comes together

“With regards to timing, we don’t see these various projects overlapping,” BioAmber EVP Mike Hartman told The Digest. “Sarnia is in production and ramping up today. The CJ joint venture is specifically to serve the China and broader Asian market, and will come on line in Q1 2018. This will be incremental sales and cash flow that we would not likely generate if trying to import Sarnia production into China. Our second North American plant, which will expand our product portfolio to include BDO and THF, is expected to achieve a financial close at the end of 2017 and begin production in late 2019 or early 2020. CJ will take the lead in building and producing in China on behalf of the JV, which will allow our team to focus on the second plant in the US or Canada.

“The royalty and earnings stream we will start to receive from the JV in 2018 will be on top of Sarnia’s contribution, and will come with no additional capital investment. This is significant, as is the fact that we could retrofit further CJCJ fermentation capacity in the future.”

The caveats

The proposed joint venture is subject to certain conditions, including technical and commercial due diligence, with the definitive agreements expected to be signed by July 2017. As part of the letter of intent, BioAmber will be selling CJCJ bio-succinic acid manufactured at its Sarnia, Ontario plant, so that CJCJ can undertake market development in China and South Korea in the first half of 2017.

The BioAmber biobased business case

As we wrote earlier this year in “No Pain, No Gain”:

Leading the succinic charge has been BioAmber, which concluded a successful IPO and is making and shipping succinic acid out of Sarnia, Ontario. To date, sales have been at the “emerging company level”, reaching $1.1M for Q4 , including initial shipments to PTTMCC Biochem, an important off-taker requiring high purity succinic acid to make bioplastic. However, more than 100 companies tested and qualified the bio-succinic acid produced in Sarnia, and in recent weeks Mitsui & Co. invested $CDN25 million in the Sarnia joint venture, increasing its equity stake from 30% to 40% and committing to play a bigger role in commercialization.

Investors have been encouraged by an average selling price for Q4 2015 above the $2,000 / MT guidance, despite low oil prices. Overall, 2015 revenues were up to $2.2M from $1.5M in 2014, and net loss for the year narrowed to $37.2M from $48.5M in 2014. R&D costs have increased to $20.3 million from $15.2 million in 2015, driven primarily by an increase in expenses related to the commissioning and start-up of the Sarnia plant.

The company’s first commercial plant opened in August at a cost of $141.5M, and volumes specified in signed take-or-pay and sales agreements exceed annual production capacity. Should the company be able to maintain a $2,000 per ton price and reach nameplate capacity of 30,000 tons at Sarnia — well, it’s not hard to get out a calculator and reach $60M in annual revenues. 2016 could well be a mighty year as the company begins to ramp up production.

The 5 Big Trends at BioAmber

We wrote about these in “When amber means caution but BioAmber means go,” here

What about Mitsui and Vinmar?

Let’s not forgt the Mitsui and Vinmar relationships.

Mitsui. As we reported in February, Mitsui this year invested an additional C$25 million in the BioAmber joint venture for 10% of the equity, increasing its stake from 30% to 40%. Mitsui said at the time it would also play a stronger role in the commercialization of bio-succinic acid produced in Sarnia, providing dedicated resources alongside BioAmber’s commercial team. BioAmber will maintain a 60% controlling stake in the joint venture.

Bioamber and Mitsui also said they would ultimately jointly build and operate two additional facilities that, together with Sarnia, will have a total cumulative capacity of 165,000 tons of succinic acid and 123,000 tons of BDO.

BioAmber’s Sarnia joint venture with Mitsui & Co. Ltd. began shipping bio-succinic acid to customers in October 2015 and is operating its manufacturing process at commercial-scale. Management expects the Sarnia plant to increase production volumes progressively to reach full capacity in 2017.

Vinmar. As we reported in 2014, BioAmber signed a 210,000 ton per year take-or-pay contract for bio-based succinic acid with Vinmar International. Under the terms of the 15-year agreement, Vinmar committed to purchase and BioAmber Sarnia committed to sell 10,000 tons of succinic acid per year from the 30,000 ton per year capacity plant that was at that time under construction in Sarnia, Canada.

As part of that succinic acid master off-take agreement, this second plant was set be expanded to an annual capacity of 100,000 tons of bio-BDO and 70,000 tons of bio-succinic acid. Vinmar will make a 10% or greater equity investment in the expanded plant and has committed to off-take and BioAmber has committed to sell a minimum of 50,000 tons per year of bio-succinic acid for 15 years following the plant’s start-up date. Vinmar also has the option to secure additional bio-succinic acid tonnage under the take-or-pay contract if BioAmber has not committed the remaining volume at the time the plant’s financing is secured.

Reaction from the stakeholders

“While we remain focused on ramping up our Sarnia plant and building a second plant in North America, this JV is an opportunity for BioAmber to accelerate the deployment of its bio-succinic acid technology on a global scale without capital investment,” stated Jean-Francois Huc, BioAmber’s CEO. “This joint venture would allow us to quickly penetrate the Chinese and broader Asian market and accelerate cash flow and earnings for our shareholders. It would also serve as a blueprint for the build-out of additional bio-succinic acid production with very limited capital investment.”

“This JV is an opportunity for CJCJ to leverage BioAmber’s unique, low pH yeast technology and utilize our existing fermentation assets more effectively in order to competitively supply the growing market for bio-succinic acid in Asia,” added Dr. Hang Duk Roh, Head of CJ CheilJedang BIO.

Fabrice Orecchioni, BioAmber’s COO, added: “CJCJ has visited our Sarnia facility and we have visited their intended plant in China. Both partners are confident that the China plant can be reconfigured to quickly produce bio-succinic acid, for a fraction of what it cost us to build our Sarnia facility.”

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.

December 12, 2016

Quick Take: What Sunpower Project Sales to 3rd Party Mean for 8.3 Energy Partners

This morning, SunPower (SPWR) announced that it had sold a majority interest in two solar projects totaling 123MW.  Owners of stock in SunPower's jointly sponsored Yieldco 8point3 Energy Partners (CAFD) might be wondering,
"Hey, shouldn't SunPower be selling these projects to CAFD?"
The Yieldco model has Yieldcos using inexpensive capital from income investors to fund the purchase of projects from their developer sponsors, which have more expensive capital because developing solar projects is riskier than owning already-developed ones.  In fact, one of the two projects in question can be found in 8point3's "Right of First Offer" or ROFO list in its last (Q3) earnings presentation:


The point is, at its current share price, 8point3 is not in a position to issue new stock to finance the equity portion of the projects in the ROFO list at prices that can be offered by their parties like the actual buyer, New Energy Solar.  In other words, CAFD does not have the inexpensive capital that the Yieldco model assumes it should.

Given the rapidly falling prices for solar modules, both Sunpower and 8point3's other sponsor, First Solar (FSLR) are not profitable, and their need for cash has had some investors worrying that its sponsors might force 8point3 to buy some projects at prices it cant afford.  This sale of projects to a their party helps alleviate that worry, and should give comfort to investors, like myself, who have been buying CAFD for its very attractive 7.6% annual yield.

That's the flip side of "expensive capital" for publicly traded securities: A high yield.  Get it while it lasts.

Disclosure: Long CAFD, FSLR.

December 11, 2016

Quick Take: Albemarle

Tom Konrad, Ph.D., CFA

Albemarle Corp. (NYSE:ALB) has come up twice in recent conversations with investment advisors in the last couple weeks.  I'm not sure why the recent surge of interest, but I thought I'd share my email in response to the most recent query.

An investment advisor friend:

Any thoughts [on Albemarle]?  A mining company corners about 35% of the raw material for the manufacture of lithium batteries for electric cars.
My response:
I like it better than most Lithium plays, because they are vertically integrated.  That said, I don't like Lithium plays in general... seems similar to the whole rare earth thing.  It's likely to be a big boom and bust commodity cycle.
Second, I just don't like mining.

On a valuation basis, ALB seems fairly valued, which means not nearly cheap enough for me.  I also dislike the high beta.

If you want to invest in cleaner transportation, my current top pick is MIXT.
Was that useful?  Let us know in the comments, or if you have more in-depth thoughs on Albemarle.

Disclosure: Long MIXT.

December 08, 2016

Aerovironment's New Farm Worker

by Debra Fiakas CFA

Unmanned aerial vehicles (UAVs) had their starting point in military exercises, carrying surveillance cameras and even bombs to sensitive sites.  Drones as we have come to call them have also zoomed across the horizons of adventuresome consumers, who see sport and entertainment possibilities.  However, drones offer time and cost savings, quality and accuracy in data gathering and safety to a host of scientists, engineers and infrastructure operators. 

According to industry research firm Markets and Markets, the unmanned aerial market is estimated to be $13.2 billion in the current year and has the potential to reach $28.3 billion by 2022.  A good share of the 13.5% compound annual growth is expected to be driven by new demand for agricultural and environmental applications.  Indeed, Price Waterhouse Coopers estimates the addressable market for drones in the agriculture market alone could reach $32.2 billion by 2025.  The PWC market size estimate seems to eclipse Markets and Markets figures.  At least Markets and Markets agrees that agriculture is the dominant growth driver for UAVs, with an estimated 30% compound annual growth estimate for the this sector through 2022.

While UAVs might not rise to the level of the electron microscope as a breakthrough technology enabling transformative innovation, it is a tool that could deliver significant energy savings and economic benefits.  For investors with a focus in energy, environment or conservation, a stake in a UAV producer should be interesting. 

Small UAVs have reached a price level delivering a cost effective way to collect high resolution images that can inform farmers, animal control personnel or environmentalists.  UAVs can be deployed rapidly to even the most remote locations.  Farmers can detect water and nutritional stress or monitor insect damage.  Wildlife authorities can observe poaching activity in real time, giving them the chance to capture perpetrators in the act.  Scientists are gaining access to data on plants and animals in even the most remote and inaccessible terrain or conditions.
Aerovironment (AVAV:  Nasdaq) has had a berth in our Mothers of Invention Index of companies offering innovative technologies that save energy or otherwise impact resource utilization. It is the largest supplier of UAVs to the U.S. military and is gaining a reputation around the world as a producer of reliable commercial drones.  The company offers a half dozen different UAV models, from the solar-powered Helios with its 247 foot wingspan to the ‘bird-sized’ Nano Air Vehicle.  The Raven was originally deployed by the U.S. military, but is also useful in commercial applications as well.  With a wingspan of 4.5 feet and total weight of 4.2 pounds, the Raven can be launch by hand and deliver aerial observations up to 10 kilometers by either a daylight or infrared camera.

The company delivered $253.3 million in total sales in the twelve months ending July 2016, providing $4.3 million in net income or $0.18 per share.  As much as 4.2% of sales were converted to operating cash flow during this period, helping bring cash on the balance sheet to $224.1 million.  Aerovironment has no debt and is able to use its ample internally generated cash for new product development. 
AVAV has a follow of at least a half dozen analysts who have published estimates of its future sales and earnings.  In the quarter ending July 2016, Aerovironment disappointed investors with a deeper than expected loss.  The bad news caused analysts to trim expectations for the quarter ending October 2016, but long-term expectations remained intact.  The consensus for the current fiscal year ending April 2017 is for $0.52 in earnings per share on about $290 million in sales. 

Financial results for the October quarter are expected this week.  Expect analyst to ask management about its most recent product innovation, the Quantix, which was introduced at the Drone World Expo in California.  Quantix has been designed to deliver efficiency and convenience.  It can collect high-resolution images on at least 400 acres of land during a single flight and then transmit the data to a cloud-service.  Users can access the data through a companion tablet.  The Quantix model is aimed primarily at, guess who  -  farmers!   Anyone who has ever had to walk a corn field looking for signs of drought or bugs will understand the appeal of a fast moving drone with a high resolution camera.  Not yet priced, Quantix is expected to contribute to revenue in last fiscal year 2017 or early fiscal year 2018.

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.

December 04, 2016

Ten Clean Energy Stocks Under Trump (November 2016)

Tom Konrad, Ph.D., CFA

So far, the broad stock market seems to like the idea of a tax and regulation-cutting and infrastructure spending Trump administration and Republican controlled Congress.  The bond market is less pleased at the rapidly growing deficits such a "borrow and spend" policy will inevitably entail.  While the S&P 500 advanced 3.4% in November, bond funds fell in the face of rising interest rates.  The iShares 20+ Year Treasury Bond (TLT) fell 8.4%.

Clean energy stocks were also hurt by the incoming President's climate change skepticism and his promises to undo environmental regulations put in place by the Obama administration.  While the PowerShares WilderHill Clean Energy ETF (PBW) fell only 0.1%, clean energy income stocks such as Yieldcos were hit by the double-whammy of rising interest rates and anti-environmental rhetoric. The Global X YieldCo ETF (YLCO) fell 5.6%.

Against this backdrop, my income-heavy Ten Clean Energy Stocks for 2016 model portfolio fared relatively well. While the seven income stocks matched YLCO's 5.6% losses, the three growth stocks shot up 9.6% (one for little apparent reason.)  This kept the overall portfolios' losses to a modest 1.0% for the month.

For the year, the model portfolio, its income and growth sub-portfolios, and the Green Global Equity Income Portfolio (GGEIP) which I manage all widened their large leads against their benchmarks. (The benchmarks are PBW for the growth stocks, YLCO for the income stocks and GGEIP, and a 30/70 blend of the two for the Ten Clean Energy Stocks model portfolio, as specified in the original 2016 article.)

Detailed performance is shown in the chart below.

2016 nov composites

How Trump Will Affect Yieldcos

While rising interest rates are bad for all income stocks, a roll-back of environmental regulations such as Obama's Clean Power Plan and a withdrawal from the Paris Climate Agreement should have little if any financial impact on Yieldcos.  This is because Yieldcos own existing renewable energy generation assets which have already received their subsidies.  Even if the last year's solar and wind tax credit extensions were to be rolled back (which most observers think is unlikely), existing solar and wind farms would almost certainly be unaffected.

In fact, a decrease in incentives to future wind farms could even help the owners of existing farms, since it would reduce competition from new, less subsidized, solar and wind when existing Power Purchase Agreements (PPAs) expire (in 10-20 years) and Yieldcos need to find new buyers for their power production.

Despite this reality, investors who are increasingly worried about coming regulatory changes and increasing interest rates are likely to use any minor hiccup at Yieldcos and other clean energy companies as an excuse to sell.

The chart below and the following discussion gives detailed performance for the individual stocks, and the reasons for it.  Click for a larger version.

10 for 16 Nov.png

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  12/31/15 Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
11/30/16 Price:  $19.63.  YTD Dividend: $1.17. 
Expected 2016 Dividend:$1.58 (8.0%) YTD Total Return: -0.8%

Wind Yieldco Pattern Energy released its third quarter earnings on November 7th.  Power production was good, and the company increased its dividend to $0.408 per share, but the investor reaction was hijacked by the statement that the company had found a material weakness in its internal controls. 
"Management believes that the Company's internal control over financial reporting was not effective as of September 30, 2016 , due to the aggregation of internal control deficiencies related to the implementation, design, maintenance and operating effectiveness of various transaction, process level, and monitoring controls. These deficiencies largely have arisen during fiscal 2016 because of growth of the Company, increases in employee headcount to support growth, and frequent changes in organizational structure were not adequately supported by elements of its internal control over financial reporting. However, management has concluded that the consolidated financial statements present fairly, in all material respects, the Company's financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. generally accepted accounting principles (GAAP).  Management has developed a plan to remediate the material weaknesses. Management expects the remediation plan to extend over multiple financial reporting periods; therefore, the Company will receive an adverse opinion on its internal control over financial reporting as of December 31, 2016 ."
In other words, while something could go wrong with financial reporting, they are confident that nothing has so far, and they have a plan to fix the problem over several months.  They're telling us now because this is not the type of thing you should try to cover up, and the company's auditors will also be saying something in the annual report, anyway.

While I never like to see any questions about accounting, it seems like Pattern caught this one early before any harm was done, and they are working to fix it.  I consider the current sell-off a buying opportunity, and have added to my position.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  12/31/15 Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
11/30/16 Price:  $28.20.  YTD Dividend: $2.025  Expected 2016 Dividend: $2.025 (7.2%) YTD Total Return: 69.1%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners has been my biggest winner for the year, and it is potentially more vulnerable to the fallout of a Trump Presidency than most of the other companies in this list.  Like most Yieldcos, its revenue comes from long term contracts with investment grade utilities, so those operations should be safe. 

Most of Enviva's potential growth prospects are with existing coal plants which want to convert to much less carbon intensive wood pellets, which Enviva supplies.  Coal plants convert to wood because it is one of the most cost effective ways to comply with greenhouse gas and other emissions rules.  In the US, Trump promises to roll back these Obama era regulations, and his promise to abandon the Paris Climate agreement may lead to Europe (the home of the majority of Enviva's current customers) taking a less aggressive stance on greenhouse gasses.

I would not see any of this as a problem if Enviva were yielding more than the current 7.5%.  I expect a higher yield from MLPs than other companies, because their special tax structure makes it difficult for many investors to own them.  I sold my entire holdings of Enviva the morning after the election.  I will continue watching the stock for opportunities to buy back in at a lower level.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
12/31/15 Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
11/30/16 Price:  $18.25.  YTD Dividend: $1.638.  Expected 2016 Dividend: $1.638 (9.0%) YTD Total Return: 24.5%

Ethanol production MLP and Yieldco Green Plains Partners may or may not benefit from a Trump administration.  The oil industry hates the EPA's Renewable Fuel Standard (RFS), which requires a minimum volume of ethanol to be blended with gasoline, and Trump has strong ties and large investments in the industry. 

On the other hand, ethanol is a domestic fuel source which reduces imports and (gallon for gallon) creates more jobs, especially in the Midwest.  In 2013, the ethanol industry created 387 thousand jobs and sold 13.3 billion gallons, or one job for every 34 million gallons.  According to industry numbers, an increase of 1.2 million barrels per day would be associated with an increase of 394 thousand US jobs.  1.2 million barrels/day equates to 15.3 billion gallons per year, or one job for every 39 million gallons per year.  If Trump's main goal is to increase domestic jobs, he will favor ethanol over his friends in the oil industry.

The EPA recently released its RFS targets for 2017-18, and for the first time in a long time, the ethanol industry felt that the EPA had released a standard in accordance with the law.  Trumps pick to head the EPA, Myron Ebell is not only a climate change denier, but also a critic of ethanol.  His libertarian Competitive Enterprise Institute often released reports critical of the ethanol mandate, so I think we can be fairly confident that future EPA ethanol mandates will be more to the satisfaction of oil refiners, even if the 2017-18 targets are not watered down.

GPP is also less protected from policy changes and market forces than other Yieldcos, because it only has long term contracts with its parent, ethanol producer Green Plains (GPRE).  Green Plains' ability to honor these obligations depends on its ability to remain solvent, which in turn depends on the ethanol market.

With this in mind, I have sold most of my shares of GPP.

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

12/31/15 Price: $13.91.  12/31/15 Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
11/30/16 Price:  $14.59.  YTD Dividend: $0.695.  Expected 2016 Dividend: $0.945 (6.5%) YTD Total Return: 10.1%

The only likely impact on Yieldco NRG Yield's (NYLD and NYLD/A) prospects due to a Trump administration is a rise in interest rates.  Given the recent decline of the stock, I've been increasing my holdings of the company's A shares.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  12/31/15 Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
11/30/16 Price:  $3.78.  YTD Dividend: $0.275.  Current Expected 2016 Dividend: $0.275 (7.3%). YTD Total Return: -24.7%

Yieldco Terraform Global released an investor update on November 29th.  The company expects to be back in compliance with NASDAQ reporting requirements in advance of its extended March 2017 deadline, but they are still negotiating with bondholders about failure to meet covenants, including timely reporting requirements.  It expects to be fully operationally independent by January.

Underlying the company's long term viability are the fact that its portfolio of solar and wind projects continue to perform well, and a hefty cash pile.  Some of this cash was used to pay down corporate level revolving debt.  Unrestricted cash at the company level was $583 million at the end of the third quarter, or approximately $3.38 per share (including both A and B shares.)  This should allow the company operational flexibility while negotiating with bondholders.

The company released a number of preliminary financial estimates for 2016, but did not include CAFD, which measures the company's ability to pay dividends to shareholders.
GLBL 9-30 estimates of FY results

If we compare these to the first quarter estimates on which I based my July 20th valuations of the stock, we can see how the numbers have changed:
GLBL 1Q preliminary numbers
As we can see, owned operational solar and wind farms have increased by 57 MW (part of which I knew about when writing the July article), power production has increased by 15% to 22% from the numbers I used for that article, capacity factor, revenue, and revenue per MWh have all also improved.  In July, I put the company's net debt at the holdco level at $461 million.  In the third quarter, net debt increased by $52 million, or by $0.91 for every new owned MW. 

Plugging these numbers into the same spreadsheet as I used for the July valuation, I revise the more conservative asset based valuation down to a range of $4.12 to $5.19 per share.  Given the lack of CAFD estimate, I can't revise the CAFD based estimate of $4.00 to $8.50, except to say that CAFD should probably have fallen slightly along with the Adjusted EBITDA estimate, which fell from an annualized $168-$192 million to the current $150-180 million.

In short, resolving Terraform Global's problems is taking longer and costing more than I had hoped, but I'm still comfortable that the company is worth well over $4, which is in turn above the current $3.78 stock price.   I continue to hold my shares but do not regret having sold a number of covered calls with a $5 strike price.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  12/31/15 Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
11/30/16 Price:  $19.88.  YTD Dividend: $0.90.  Expected 2016 Dividend: $1.24  (6.2%). YTD Total Return: 9.6%

Clean energy financier and REIT Hannon Armstrong has fallen due to rising interest rates and concern that it might lose its status as a REIT.
I feel the risk of a potential loss of REIT status has been overblown.  REIT expert Brad Thomas provides a good summary: The short version is, don't panic! 

I added slightly to my Hannon Armstrong position after it dipped below $20.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  12/31/15 Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
11/30/16 Price:  C$13.73.  YTD Dividend: C$0.8063  Expected 2016 Dividend: C$0.88 (6.4%) YTD Total Return (US$): 45.4%

Canadian listed Yieldco TransAlta Renewables' fell sharply after the US election, as did many Canadian income stocks, which in general fell more than their US brethren.  I'm not sure why this is other than the fact that Canadian stocks had been trading at higher valuations than US stocks in the run-up to the election.  The stock has begun to recover from its sharp fall since November 14th.

Given TransAlta's relatively rich valuation compared to my other Yieldco holdings, I sold most of my position on November 9th, and only bought a little of that back after the stock fell 10% over the next couple days.

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. 
11/30/16 Price:  $9.75.    YTD Total Return: 5.0%

Advanced biofuel producer Renewable Energy Group, like ethanol producers (see the Green Plains Partners discussion above), is potentially more vulnerable to action by an administration skeptical of renewable energy than are Yieldcos.   That said, the company remains very attractively valued, and I don't know if I made the right move in selling most of my holdings in response to the election.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. 12/31/15 Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
11/30/16 Price:  $5.83 / R3.28.  YTD Dividend: R0.08/$0.138  Expected 2016 Dividend: R0.08 (2.4%)  YTD Total Return: 42.3%

Software as a service fleet management provider MiX Telematics is a significant potential beneficiary of a Trump administration.  First, many of MiX's largest clients are part of the global oil and gas industry.  The drilling revival that Trump hopes to bring about should lead these customers to buy more vehicles, and they pay MiX for fleet management on a per-vehicle basis.

Even if the oil market continues to revive, this South Africa based company's stock price is vulnerable to a flight to safety triggered by the greater global uncertainty which an unprecedented and relatively unpredictable Trump administration may bring.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
11/30/16 Price:  $5.95.  YTD Total Return: -1.7%

Energy service contractor Ameresco is the company in this list which I deem most vulnerable to action by a Trump administration.  This is because the company's bread and butter is energy service contracts with federal government agencies.  In recent years, these contracts have been driven by increasingly ambitious targets for energy saving in Federal buildings set by the Obama administration.  These targets are among the executive actions which Trump could easily reverse with the stroke of a pen.

Such energy saving initiatives save money and create jobs, so it would be irrational for Trump to reverse these particular executive actions.  That said, I do not have a lot of confidence he will do (or refrain from doing) anything just because it makes sense.  The market seems to think otherwise, as Ameresco rallied 24% in November.  Perhaps investors are simply buying stocks of companies that do a lot of business with the Federal government because of the expected surge in infrastructure spending?  I'm open to your ideas.

Sneak Peek: 10 Clean Energy Stocks for 2017

I and the owners of AltEnergyStocks.com are considering launching a premium service for paying subscribers.  This would include early or exclusive looks at my most actionable investment ideas, like the one I recently wrote about Seaspan Worldwide.  It will also likely include more timely comments on news events as they affect the stocks I follow.  The details will depend on what you tell us you want and are willing to pay for.  The people I'll pay the most attention to are those who have demonstrated a willingness to pay for my writing in the past.

To that end, I'm offering an opportunity to see next year's list of 10 Clean Energy Stocks one trading day before it's published, but only to people who think my writing is worth paying something for. If you are one of those people, please send $5 to me at tom at alt energy stocks dot com (no spaces), and I will email you a draft version of the article a full trading day before it is published on AltEnergyStocks.com. If you don't use PayPal, send me a note and I will respond with the address for a check.

I don't usually decide on the stocks in my annual list until after Christmas, since last minute changes in valuation sometimes make a difference as to how well I think a stock will do in the following year. With that caveat, this year's list looks likely to include at least one thinly traded energy efficiency stock that, like MiX Telematics, should benefit from an revival of the oil and gas industry but which is too small to be on most investors' radar.

If you think an early look at next year's list is not worth $5, but think some of my future writing might be worth paying for, just PayPal me (your) two cents, and I'll add you to the list of people who get to have input into what might be included in future AltEnergyStocks premium content, and how much it should cost.

Final Thoughts

Last month, I was optimistic for the chances of a Clinton victory, and saw the market's sell-off in the months running up to the election as an opportunity to buy relatively cheap names like Hannon Armstrong and Pattern which have good prospects not matter who is in the White House.  I still like these names, but I am deeply puzzled that one stock I thought could really benefit from a Clinton victory, Ameresco, has advanced the most.


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.

December 02, 2016

3 Biofuels Reports We Can Ignore, and One We Can't

Jim Lane

This week, in Washington and Brussels, four news flashes on global renewable fuel volumes appeared on the radar. Can you safely ignore them and get on with other work, or is there something to get deeply informed about? Let’s look into it.

Ignore This #1. The Point of Obligation RFS Crisis.

The issue.

Several parties petitioned the US EPA to shift obligations under the Renewable Fuel Standard from them to someone else. Basically, to anyone else. The petitioners want relief from buying RINs, thinking about renewables, or experiencing any pain associated with the change in the fuels marketplace which the Congress mandated in the 2007 EISA Act.

The Bottom Line:

Unless EPA goes completely insane, it’s a no-brainer to ignore.

Why We’re Talking About It:

The EPA has proposed to deny the petitions, but hasn’t actually finalized the denial. And, the EPA has proposed to open up a broader comments period on the issue. In short, it’s done everything it can to p—s off the losers and not yet make winners feel secure.

The Latest News:

A group of trade associations representing various segments of the fuel industry (which don’t usually agree on anything) have signed onto a letter – for the first time ever – that will go to EPA Administrator Gina McCarthy and will help inform the Trump transition team.

Get this: the list includes, the American Petroleum Institute, Advanced Biofuels Association, Growth Energy, National Association of Convenience Stores, Renewable Fuels Association, National Association of Truck Stop Operators, Petroleum Marketers Association of America, Society of Independent Gasoline Marketers of America. So you have renewable fuel producers, retailers, and oil refiners.

Why you can safely ignore:

It’s a change no one of any importance really wants.

Ignore This #2 The US GAO Report

“Renewable Fuel Standard, Program Unlikely to Meet its Targets for Reducing Greenhouse Gas Emissions.”

The issue:

Senator James Lankford of Oklahoma, chairing a Senate subcommittee, requested a report from the Government Accounting Office on the issues related to advanced biofuels R&D. Specifically, how the federal government has supported advanced biofuels R&D in recent years and where its efforts have been targeted and expert views on the extent to which advanced biofuels are technologically understood and the factors that will affect the speed and volume of production.

Lankford, in case you were wondering, introduced a bill to repeal the corn ethanol mandate in 2013 with the Ghost Fuels Deletion Act and again in 2014 with the Phantom Fuels Elimination Act. He again called for repealing the RFS in June 2015. So, if you regarded this report as a political exercise, you wouldn’t be alone.

The Bottom Line:

You can safely ignore this 38-pager.

Why We’re Talking About It:

The issuing of the Report gives occasion for renewable fuel-haters to Dis the RFS and say that the program is not working. Meanwhile, BIO has used the report as an opportunity for EPA shaming, stating:

“EPA’s delays and methodology for setting the annual RFS chilled investment in advanced biofuels…Further, EPA continues to be too slow in making decisions on RFS pathway review and approval process…BIO has repeatedly pointed out that EPA’s delays and reductions in the annual volumes have caused increases in transportation-related greenhouse gas emissions.”

The Latest News:

The GAO report is here. The 1-pager is here. Here’s an excerpt to give you the flavor.

Biofuels that are technologically well understood include biodiesel, renewable diesel, renewable natural gas, cellulosic ethanol, and some drop-in fuels. A few of these fuels, such as biodiesel and renewable diesel, are being produced in significant volumes…[but have]…feedstock limitations. Current production of cellulosic biofuels is far below the statutory volumes and… production costs are currently too high…Drop-in fuels are…too costly. Among the factors…the low price of fossil fuels relative to advanced biofuels…Experts also cited uncertainty about government policy…the RFS and federal tax credits…investors do not see them as reliable and thus discount their potential benefits when considering whether to invest.

Why You Can Safely Ignore:

Everyone already knows all this, the GAO report is a statement of the obvious. We might add, the entire report was written based only on talking to academics and government officials. This is a political haymaking and not much more.

Consider this as a Warning Label for the Report: “No Actual Fuel Producer, Oil Refiner, Technology Developer or Investor was disturbed during the Making of this Report.”

Ignore This #3 The Canada Course Correction

The Issue:

Canada’s Ecofiscal Commission recently released a report entitled Course Correction, which calls on the Canadian government to rethink its biofuels policies.

The Bottom Line.

Skip it. Everyone else did. Including the Canadian government, who celebrated the report’s criticism of biofuels policies but announcing an expanded national Low Carbon Fuel Standard.

Why We’re Talking About it:

Probably because so many economists, academics, technical experts, and businesses have rejected the report’s data, methodology and findings. Keeping it perversely alive.

Why You Can Safely Ignore:

As Gord Miller, former Environmental Commissioner of Ontario told the National Post: “As I see it, Ecofiscal’s Course Correction report, if embraced, would have the following net result: greenhouse gas emissions would increase, urban air quality would deteriorate, and consumers would pay more for fueling their vehicles. Moreover, all access to the liquid transportation fuel market for current and future renewable or alternative fuels would be eliminated, and research and development of biofuels would be shut down. If anything, it’s Ecofiscal’s work that needs a thorough review from a broader perspective.”

One You Can't Ignore: The European Commission’s new Clean Energy Package

Report proposes to phase out, or significantly reduce, the use of conventional biofuels in Europe.

The issue:

In the proposed Renewable Energy Directive for the period post-2020, the European Commission proposed to reduce the maximum contribution of conventional biofuels, such as ethanol made from corn, wheat and sugar beet, to the EU 2030 renewable target – from a maximum of 7% of transport fuels in 2021 to 3.8% in 2030. The Commission also proposed a binding blending obligation of 6.8 % to promote other ‘low emissions fuels’ such as renewable electricity and advanced biofuels used in transport.

The Bottom Line:

Sorry, this one you have to pay attention to.

Why We’re Talking About it:

As Novozymes (NVZMY) Vice-President for Biorefining Thomas Schrøder summed it up perfectly: “The proposed gradual phase out of all conventional biofuels would only increase the share of fossil fuels in transport and add GHG emissions. By 2020, the aim was to have 10% renewables in transport, by 2030, the ambition is lowered to 6.8%. The European Commission failed to reflect in its proposal the latest science and evidence that demonstrate the very high sustainability profile of a series of conventional biofuels. For example, conventional ethanol effectively reduces GHG emissions today (by 64% on average compared to petrol) even when indirect impacts are accounted for. They have a legitimate role to play in the EU energy mix.”

Schrøder adds: “As far as advanced biofuels are concerned, the proposal to have a specific mandate of minimum 3.6% by 2030 is welcomed…However, advanced biofuels are not meant to replace perfectly sustainable conventional biofuels; they are meant to replace an increasing share of fossil fuels and reduce more GHG emissions.”

Why You Can’t Safely Ignore:

The proposal is likely to make it’s way into the EU’s Renewable Energy Directive, and it’s not going to be a simple case of switching all the stranded ethanol production over to advanced biofuels. This is not an attack on ethanol, it’s an attack on feedstock. Or, rather the perception of scarcity implicit in the “food vs fuel” debate. EU regulators hope to secure food for Europeans by phasing out the conversion of grains and oils to fuels. Yet, what happens when supply outstrips demand? Commodity prices fall, and production exits the market, reducing the very grains and oil supply that the new directive is supposed to secure.

The fashionable beliefs in the EU about the nature of agricultural commodity markets, remind us of the European idea, fashionable in the 1920s, that you could end the catastrophe of war through unilateral disarmament. Instead, European democracies were simply unprepared for the military crises of the late 1930s and Europe experienced its greatest catastrophe since the 30 Years War and the Black Death as a result. Never underestimate the EU Commission’s appetite for policies that could plunge the region into a food and emissions crisis, while proclaiming all the while its interest in the opposite result.

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

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