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March 19, 2017

Ten Clean Energy Stocks For 2017: Earnings Season

Tom Konrad Ph.D., CFA

Earnings season began in earnest in February.  My Ten Clean Energy Stocks model portfolio gave back a little of its large January gains because a mix of good and bad earnings mostly offset each other.  One pick (Seaspan Preferred) gave back its large January gains.  Neither the original gain nor the loss were driven by news.  Instead, they seemed driven by investors changing expectations for global trade in an uncertain political environment.

  For the year to March 17th, the portfolio and its income and growth subportfolios were all up 7.7%, 8.8%, and 5.4%.  Clean energy stocks in general also did well, with my three respective benchmarks up 7.0%, 6.6%, and 8.0%.  (I use the Yieldco ETF YLCO as a benchmark for the income stocks, the Clean Energy ETF PBW as a benchmark for the growth stocks, and an 80/20 blend of the two as a benchmark for the whole portfolio.)  The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage returned 6.7%.

   The overall and growth portfolios all continue to out-perform their benchmarks, while PBW shot ahead of my two growth picks in February. 

Detailed performance is shown in the chart below:

10 for 17 Total return 12/31/16 to 3/17/17

Stock discussion

Below I describe each of the stocks and groups of stocks in more detail. 

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99.  Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67.  Low Target: $18.  High Target: $30. 
2/28/17 Price: $20.79.  YTD Dividend: $0.  Annualized Dividend: $1.655.  YTD Total Return: 9.5%
3/17/17 Price: $20.41  YTD Total Return: 7.5%

Wind-focused Yieldco Pattern Energy Group reported fourth quarter and full year 2016 results on March 1st, increasing the quarterly dividend 1.4%. I did not see anything to be concerned about in the earnings report, and I like the fact that Pattern, unlike many Yieldcos, has a focus on managing its assets efficiently rather than being content to be a passive owner of wind farms.

The stock declined slightly in response to the report, most likely because the firm's accountants reported a material weakness in Pattern's internal accounting controls.  Management announced the discovery of this weakness in its third quarter earnings report, and they are working to correct it and continue to certify the accuracy of their financial statements. 

Some investors will only invest in companies where the independent accountants have no reservations, and this report is the first one to be audited since the weakness was discovered.  This is why I expect the stock fell slightly in response to an otherwise solid earnings announcement.

While not yet relevant to Yieldco shareholders, Pattern Energy's parent, Pattern Development, completed the largest wind power project in British Columbia, the 184.6 MW Meikle Wind farm.  Long-time readers will recognize Meikle as the same project that Finavera (a speculative extra pick in 2014) sold to Pattern Development that year.  My track record picking such speculative stocks is poor (Finavera was no exception,) which is why I don't do it any more, and stick to companies with long term solid cash flows like Pattern.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98.  Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05.  Low Target: $10.  High Target: $20.
2/28/17 Price: $13.31.  YTD Dividend: $0.  Annualized Dividend: $1.00.  YTD Total Return: 2.5%
3/17/17 Price: $12.70  YTD Total Return: -2.2%

Solar-only Yieldco 8point3 reported fourth quarter earnings on January 26th, and I covered them at the start of February.  As I said at the time, the market is concerned about the Yieldco's plans to refinance its interest-only company level debt with amortizing project level debt, and the impact this might have on its ability to grow its dividend.

I personally like the move, as it increases the safety of the stock, and I don't require dividend growth to think that a company with a 7.8% yield is a decent value.  Worries that 8point3 will not be able to refinance its debt and comparisons to bankrupt SunEdison are overblown.  Unlike SunEdison, the overall level of 8point3's debt ($673 million, per the Q4 Earnings Presentation) is easily manageable given its current annual EBITDA ($106 to $133 million expected for 2017.)  The weighted average of 8point3's power purchase agreements is over 20 years, and the company currently pays LIBOR+2% (less than 4%) interest on most of its debt.  If we assume the company refinances with amortizing project level debt at a 5% interest rate and an average 20 year term, the annual payment (interest plus principal) will be about $50 million, compared to the current annual interest-only payment of $25 million.

The company's outlook is for $91 to $101 million in 2017 cash available for distribution.  Since this number likely includes some principal payments, we can expect that even if all of the Yieldco's debt is immediately replaced with amortizing debt, there will be $80 million to $90 million in CAFD available to continue paying the current $1 annual dividend on the company's 79.1 million class A and B shares.

As a worst-case scenario for shareholders, we should consider buying the stock at its current price, and receiving the current $1 dividend for 20 years, after which the stock becomes valueless.  The internal rate of return for this cash flow stream is 4.8%: not particularly attractive, but something I'm quite comfortable with as a worst-case scenario. 

I've been selling puts on the stock in order to add to my position if the stock price falls any further, or collect income if it does not.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI)

12/31/16 Price: $18.99.  Annual Dividend: $1.32 (7.0%).  Expected 2017 dividend: $1.34 to $1.36.  Low Target: $15.  High Target: $30. 
2/28/17 Price: $19.79.  YTD Dividend: $0.  Annualized Dividend: $1.32.  YTD Total Return: 4.2%
3/17/17 Price: $19.20  YTD Total Return: 1.1%

Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure Hannon Armstrong reported earnings after the close on February 22nd. 

As I've previously discussed, the stock has been depressed recently because of worries about the possibility that the company might lose its REIT status.  I have long believed that the company's REIT status is not in danger, and, if it were, the impact on distributions would be minimal.  In the earnings conference call, CEO Jeff Eckel addressed these concerns, saying that he did not expect the IRS to question HASI's REIT status.  He went on to say that if the company chose to convert to a taxable corporation, it could do so without any impact to its core earnings or distributions.

Shortly after the earnings announcement, the company conducted a secondary offering of common stock.  The company typically makes several small secondary offerings each year shortly after earnings announcements.  The new supply of stock temporarily depresses the stock price and provides an excellent buying opportunity for stock market investors.  The current price of $19.20 represents such an opportunity.

NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36.  Annual Dividend: $1.00 (6.5%). 
Expected 2017 dividend: $1.00 to $1.10.  Low Target: $12.  High Target: $25. 
2/28/17 Price: $16.82.  YTD Dividend: $0.26.  Annualized Dividend: $1.04.  YTD Total Return: 11.2%
3/17/17 Price: $16.70  YTD Total Return: 10.4%

Yieldco NRG Yield (NYLD and NYLD/A) announced 4th quarter earnings on February 28th and increased its quarterly dividend 4% to $0.26.  The company is targeting continued annual per-share dividend growth of 15% through 2018.  While such growth is likely for the next few quarters, I believe analysts' dividend expectations will be scaled back for 2018 unless the stock price recovers and allows the company to raise new equity at more attractive prices.

One sour note was a $183 million non-cash impairment charge on certain wind farms acquired in 2015.  $162 million of this was pure accounting fiction, and simply reflects that the price at which the assets were originally recorded on the books was more than NRG Yield had actually paid for them, but the other $21 million has to do with a change in NRG's assumed long term power prices after the Power Purchase Agreements expire in 2017, 2022, and 2025.  In other words, NRG Yield is admitting that, in hindsight, it overpaid for these three wind farms by at least $21 million, or about $0.20/share because of overly rosy long term assumptions about the value of the wind farms. 

I believe many Yieldcos make overly rosy assumptions about the value of their assets after contract expiration, which is part of the reason why I have always preferred Yieldcos with high current dividends over ones promising high levels of long term growth.  It's easy to come up with assumptions that can justify very attractive long term growth rates, but that does not mean that those assumptions will be true.  Dividends paid today are much harder to manufacture with accounting gimmickry.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35.  Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.  High Target: $30.
2/28/17 Price: $21.76.  YTD Dividend: $0.  Annualized Dividend: $1.00.  YTD Total Return: 12.5%
3/17/17 Price: $21.67  YTD Total Return: 12.0%

Atlantica Yield announced its fourth quarter and full year results on February 27th.  As expected following the receipt of forbearances from the Department on Energy on January 13th (and discussed here), the Yieldco raised its dividend 53% to $0.25.  I expected a larger increase, to near $0.29 a share, but the firm still says that it will be able to increase the dividend to a sustainable rate of $1.60 when/if it is able to obtain forbearances on two projects in Mexico.  Reduced dividends in 2016 gave the company the opportunity to reduce corporate debt by 4% in 2016 even while making acquisitions.

The company has a conservative capital structure of mostly amortizing project level debt, as well as a conservative 80% target payout ratio and no IDRs.  Without a sponsor, the Yieldco has the freedom to use the retained cash flow to make targeted acquisitions from third parties.  Most other Yieldcos are committed to only making acquisitions from their sponsors, reducing competition for attractive projects.  All this means that Atlantica, now that the last effects of its former sponsor's bankrupt are being dealt with, is better positioned for growth than most Yieldcos (with the possible exception of NEP.)

I've also been selling puts on ABY, and think the stock remains attractive at the current price.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54.  Annual Dividend: $1.36 (5.3%). 
Expected 2017 dividend: $1.38 to $1.50.  Low Target: $20.  High Target: $40. 
2/28/17 Price: $30.79.  YTD Dividend: $0.353.  Annualized Dividend: $1.41.  YTD Total Return: 21.9%
3/17/17 Price: $33.51  YTD Total Return: 32.7%

NextEra Energy Partners stock continues to advance after the release of its fourth quarter earnings in January, most likely due to analysts continuing to increase their price targets in response to the reduced IDR (see the last update for details.)

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60.  Annual Dividend: $1.00 (6.4%).  Expected 2017 dividend: $1.00 to $1.06.  Low Target: $10.  High Target: $30. 
2/28/17 Price: $16.18.  YTD Dividend: $0.  Annualized Dividend: $1.00.  YTD Total Return: 3.7%
3/17/17 Price: $15.65  YTD Total Return: 0.3%

Waste-to-energy developer and operator Covanta reported fourth quarter and annual results on February 16th. Earnings and revenues fell short of analysts' expectations, although they were in line with company guidance.  With the commencement of operations at the company's Dublin facility, and higher metals recovery, the company is guiding for modest EBITDA growth but lower Free Cash Flow growth in 2017.  The lower free cash flow for 2017 does not seem likely to be the beginning of a trend.  Rather, it will be mostly driven by the reversal of a decline in working capital in 2016.

The company also declared its regular $0.25 dividend payable to shareholders of record on March 30th.  It also issued $400 million of 5.875% notes due in 2025 to refinance debt with an interest rate of 7.25% and maturing in 2020.  The net effect of this transaction should be to lower the company's interest payments while extending the maturity of its outstanding debt.

The company is preparing to commence operations at its newest facility in Dublin, Ireland in March.

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94.  Annual Dividend: $2.05 (10.3%).  Expected 2017 dividend: $2.05.  Low Target: $18.  High Target: $27. 
2/28/17 Price: $20.56.  YTD Dividend: $0.51.  Annualized Dividend: $2.05.  YTD Total Return: 5.4%
3/17/17 Price: $20.41  YTD Total Return: 4.7%

Leading independent charter owner of container ships reported earnings on March 1st, with a two-thirds cut to the common stock dividend.  A dividend cut was expected, and this cut was at the high end of the expected range.  This is good news for preferred shareholders, since the less money is paid to common share holders and is instead used to strengthen the company's balance sheet and operations, the safer the (fixed) preferred dividends become. 

Operationally, the company also delivered good news, with cost controls resulting in an 11.7% reduction in vessel ownership costs in the fourth quarter. 

The common stock fell, as would be expected with such a large dividend cut, but the preferred shares have also declined slightly.  I've added to my already large position in the preferred since the earnings announcement.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19.  Annual Dividend: $0.14 (2.3%).  Expected 2017 dividend: $0.14 to $0.16.  Low Target: $4.  High Target: $15. 
2/28/17 Price: $7.12.  YTD Dividend: $0.037.  Annualized Dividend: $0.14.  YTD Total Return: 15.6%
3/17/17 Price: $6.90  YTD Total Return: 12.0%

Vehicle and fleet management software as a service provider MiX Telematics announced the results of its third fiscal quarter on February 2nd, delivering strong subscription revenue and increasing its guidance for its 2017 fiscal year, which ends on March 31st.  I find it encouraging that the strong results came from strength in virtually every aspect of MiX's business, rather than a couple of large sales.  The growth and increase in subscription revenue is also allowing the company to increase its profitability because subscriptions produce higher margins than equipment sales, and spreading its fixed cost over a larger revenue base reduces per-unit overhead.

Investors initially reacted favorably to the strong quarter, sending the stock upward.  It has since fallen back somewhat.  If you do not already have a position in the stock, I see this as an excellent opportunity to take advantage of the company's strengthening growth prospects before they are fully priced in by the market.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13.  Annual Dividend and expected 2017 dividend: None.  Low Target: $3.  High Target: $10. 
2/28/17 Price: $4.13.  YTD Total Return: 0%
3/17/17 Price: $4.08  YTD Total Return: -1.2%

Aspen Aerogels fourth quarter earnings were worse than expected, with the important subsea segment reducing revenue even below the company's already bearish guidance.  The company has made progress expanding the customer base, but this is a slow process and the company does not expect any large sales to single customers like it has had in the past.  While the growing base of smaller customers should lead to better long term income stability and growth, they are currently only filling the gap left by the disappearance of larger one-off sales.

The company's long term prospects remain encouraging, but investors should be prepared for a couple more quarters for disappointing growth.  I have sold my position in anticipation of short term stock weakness which should allow me to repurchase the stock at a lower price, most likely after first or second quarter earnings announcements.

Final Thoughts

Broad stock market valuations remain high despite an unpredictable political climate.  I think that investors should continue to position themselves companies with long term contracted cash flows that are unlikely to be significantly affected by possible economic disruptions.  Given the anti-renewable energy rhetoric coming from Washington DC, Clean Energy Yieldcos like PEGI, ABY, HASI, and CAFD seem to have the perfect mix of low valuations combined with very safe revenue streams.  Worries about global trade also seem to be causing investors to undervalue the security of the dividends on Seaspan's preferred shares.

I've been increasingly focusing my investments on these names, while reducing exposure to the market in general.  These tactics are unlikely to deliver the 20-30% portfolio returns I managed last year, but right now I think investors should be wise to focus on protecting themselves from potential market disruptions.

Disclosure: Long HASI, MIXT, PEGI, NYLD/A, CAFD, CVA, ABY, NEP, SSW-PRG, ASPN, GLBL, TERP.  Long puts on SSW (an effective short position held as a hedge on SSW-PRG.)

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.

March 17, 2017

Trump to Health, Education, Small Business, and the Environment: You're Fired!

Jim Lane 

Good-bye ARPA-E, DOE, Loan Guarantee program, Energy Star, OPIC, USTDA, NEA, and the Advanced Technology Vehicle Manufacturing Program. Even Big Bird gets the guillotine.

In Washington, the White House released its budget requests for 2018, a high-level, 62-page overview of President Trump’s strategy for “Making America Great Again”.

Departmental impact

In order of percentage impact, the departments are as follows.

Defense: Up $52B or 8 percent
Veterans Affairs: Up
$4.4B or 6 percent
 Homeland Security: Up $2.8B or 7 percent
Small Business Administration: Down $43M or 5 percent
Health & Human Services: Down $15.1B or 18 percent
State: Down $10.1B or 28 percent
Down $9B
or 13 percent
Housing & Urban Development: Down $6.2B or 13 percent
Down $5.6B
or 6 percent
Agriculture: Down $4.7B or 21 percent
EPA: Down $2.6B or 31 percent
Labor: Down $2.5B or 21 percent
Transportation: Down $2.4B or 13 percent
Interior: Down $1.5B or 12 percent
Commerce: Down $1.5B
or 16 percent
Justice: Down $1.1B or 4 percent
Treasury: Down $0.5B or 4 percent
NASA: Down $0.2B or 1 percent

Well-known programs slated for 100% funding cuts include:

the Chemical Safety Board
the Corporation for Public Broadcasting
the Delta Regional Authority
the Inter-American Foundation
the U.S. Trade and Development Agency
the Legal Services Corporation
the National Endowment for the Arts
the National Endowment for the Humanities
the Overseas Private Investment Corporation
the Woodrow Wilson International Center for Scholars
discretionary activities of the Rural Business and Cooperative Service
Energy Star
Advanced Research Projects Agency-Energy,
the Title 17 Innovative Technology Loan Guarantee Program
the Advanced Technology Vehicle Manufacturing Program

Highlight Impacts for Selected Departments

Department of Agriculture (USDA)

The Administration says: “The President’s 2018 Budget requests $17.9 billion for USDA, a $4.7 billion or 21 percent decrease from the 2017 annualized continuing resolution (CR) level (excluding funding for P.L. 480 Title II food aid which is reflected in the Department of State and USAID budget).”

• Reduces funding for lower priority activities in the National Forest System.
• Continues to support farmer-focused research and extension partnerships at land-grant universities and provides about $350 million for USDA’s agship competitive research program.
• Reduces funding for USDA’s statistical capabilities, while maintaining core Departmental analytical functions, such as the funding necessary to complete the Census of Agriculture.
• Eliminates the duplicative Water and Wastewater loan and grant program.
• Reduces staffing in USDA’s Service Center Agencies to…reflect reduced Rural Development workload, and encourage private sector conservation planning.
• Eliminates discretionary activities of the Rural Business and Cooperative Service, a savings of $95 million from the 2017 annualized CR level.

The Department of Energy

The Administration says: “The Budget for DOE…reflects an increased reliance on the private sector to fund later-stage research, development, and commercialization of energy technologies and focuses resources toward early-stage research and development. It emphasizes energy technologies best positioned to enable American energy independence and domestic job-growth in the near to mid-term.”

The President’s 2018 Budget requests $28.0 billion for DOE, a $1.7 billion or 5.6 percent decrease from the 2017 annualized CR level.

• Provides $120 million to restart licensing activities for the Yucca Mountain nuclear waste repository and initiate a robust interim storage program.
Eliminates the Advanced Research Projects Agency-Energy, the Title 17 Innovative Technology Loan Guarantee Program, and the Advanced Technology Vehicle Manufacturing Program.
• Ensures the Office of Science continues to invest in the highest priority basic science and energy research and development as well as operation and maintenance of existing scientific facilities for the community.
• Focuses funding for the Office of Energy Efficiency and Renewable Energy, the Office of Nuclear Energy, the Office of Electricity Delivery and Energy Reliability, and the Fossil Energy Research and Development program on limited, early-stage applied energy research and development activities where the Federal role is stronger.


The Administration says: “The budget for EPA reflects…President’s priority to ease the burden of unnecessary Federal regulations that impose significant costs for workers and consumers EPA would primarily support States and Tribes in their important role protecting air, land, and water in the 21st Century.”

The President’s 2018 Budget requests $5.7 billion for the Environmental Protection Agency, a savings of $2.6 billion, or 31 percent, from the 2017 annualized CR level.

The President’s 2018 Budget:

• Discontinues funding for the Clean Power Plan, international climate change programs, climate change research and partnership programs, and related efforts—saving over $100 million for the American taxpayer compared to 2017 annualized CR levels. Consistent with the President’s America First Energy Plan, the Budget reorients EPA’s air program to protect the air we breathe without unduly burdening the American economy.
• Avoids duplication by concentrating EPA’s enforcement of environmental protection violations on programs that are not delegated to States, while providing oversight to maintain consistency and assistance across State, local, and tribal programs.
• Eliminates more than 50 EPA programs, saving an additional $347 million compared to the 2017 annualized CR level. Lower priority and poorly performing programs and grants are not funded…examples of eliminations in addition to those previously mentioned include: Energy Star; Targeted Airshed Grants; the Endocrine Disruptor Screening Program; and infrastructure assistance to Alaska Native Villages and the Mexico Border.

Department of Transportation

The Administration says: “The Budget request reflects a streamlined DOT that is focused on performing vital Federal safety oversight functions and investing in nationally and regionally significant transportation infrastructure projects.”

The President’s 2018 Budget requests $16.2 billion for DOT’s discretionary budget, a $2.4 billion or 13 percent decrease from the 2017 annualized CR level.

Digest analysis and comment

6 points to absorb for now.

1. It’s a budget request, not an appropriation. All of this has to go through the sausage-making process in the House and Senate.

2. It’s in many ways a War Budget. Not so much a war on big government — as much as a War Budget in the form of sharply increased defense-related and security-related spending. Overall, this is a shift in government priority, not a shift towards smaller government. Overall discretionary (excluding contingency funds) is reduced by $1 billion, out of a $4 trillion US budget. The cut is symbolic — while the shift towards Defense and Homeland Security is real.

3. The focus is shifting away from the, expensive, risky, Murky Middle of “bringing technologies from the lab to ready-for-commercialization”. Instead, the budget emphasizes “energy technologies best positioned to enable American energy independence and domestic job-growth in the near to mid-term” while at the same time shifting spending “toward early-stage research and development”.

If you’ve wondered how the government will foster technologies that are near-term and mid-term while retreating away from commercialization activities in favor of a retreat into basic R&D, you’ve raised a good question. If you say to yourself that “the commercialization program was built because private industry, in the past, has repeatedly not picked up the slack”, you’ve raised a good point.

4. There’s a lot of “we’re still going to do it” combined with “someone else is going to pay for it” in Trumpenomics. The Mexican Wall is a prime example — “they’ll pay, you’ll see” goes the refrain. So we see quite a bit of emphasis on energy independence and advanced fleet, but corporations will pay for everything beyond early-stage R&D. And we see a lot of “the States and Tribes’ll do it” on protecting the environment. Consider it a shift in the Glorious Burden, not a big change in what the goals and priorities are.

5. EPA enforcement or responsiveness on anything is likely to be greatly affected.

6. A lot of Goodbye. In the sector of the advanced bioeconomy, think Energy Star, ARPA-E, the DOE Loan Guarantee program, and the Advanced Technology Vehicle Manufacturing Program.

What does it mean?

1. Big companies rock. Those that have the financial resources to absorb a bigger commercialization effort will face less competition, that’s for sure — from entities that have relied on loan guarantees.

2. For the advanced bioeconomy, as we have pointed out before, the Obama Administration was so profoundly shifted towards the power sector and electric cars that the cuts will be felt by fuels and chemicals perhaps less than any other sector in clean tech. The Loan Guarantee and ARPA-E programs were massively tilted towards power and electrics — far exceeding the share of market held by the power sector — and that goes for the Advanced vehicle program, too.

3. I wouldn’t bet on a gigantic appetite for continuing the $7500 tax credit for buying an electric vehicle, under this Administration. That’s tax policy rather than budget, but tax reform is on the table this year in DC too, and if the Administration is willing to gut everything else related the deployment of electrics, they’re unlikely to be in love with a market-distorting and huge tax credit.

Which might, in the end, put more emphasis back onto renewable fuels as an affordable, low-cost, pro-American, environmentally-friendly technology set. Not to mention that renewable chemicals got so little love that they literally had almost nothing to lose.

The Bottom Line

Bad news for many, but look on the bright side: perversely, could be great times for renewable fuels and chems — it’s a bit of a playing field leveler for the liquid cleantech sector that’s been the Cinderella under Obama (and I mean the early scenes when Cinderella is progressively reduced from daughter to wretch).

And for those looking for real estate in DC, prices should be dropping soon.

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.

March 16, 2017

Avantium IPO "Many Times Oversubscribed:" What Buyers Are So Excited About

Jim Lane 

In France, Avantium completed its highly-anticipated initial public offering, raising $109.5M (€103M) via the sale of 9,401,793 shares at $11.70 (€11) per share, giving the company a market capitalization reaches of $294M (€277M). Trading will begin on March 15th 2017 on Euronext Amsterdam and Euronext Bruxelles under the symbol AVTX.

The Company anticipates to use €65-75 million of the net proceeds of the Offering for the funding of the Joint Venture, enabling it to construct and operate the reference plant for the commercialization of the YXY technology. The company’s first world-scale plant is a 50,000 tons per year FDCA production unit planned for Antwerp as part of a joint venture with BASF. The rest of the funds will be used to build pilot plants for the company’s Zambezi and Mekong renewable chemicals projects, as well general corporate purposes.

According to the company’s primary shareholder, Sofinnova Capital VI, the offering was “many times oversubscribed“ and the company indeed raised more capital in the IPO than its initial target of $106M (€100M), as set when the company launched its roadshow last month.

“Avantium has completed one of the most successful IPOs in this emerging and promising renewable chemistry sector,” said Denis Lucquin, Managing Partner at Sofinnova Partners and Avantium Board member since 2011. “This success comes just a few weeks after Sofinnova Partners announced the first closing of its Sofinnova IB I Fund entirely dedicated to renewable chemistry, and fully validates our vision and strategy. As lead investor, and still main shareholder after the IPO, we are extremely pleased with this listing. It confirms investors’ confidence in the team’s talent and ability to transform a visionary project into a performing global company.”

You can see the Sofinnova Fund announce, as filmed live on the ABLC main stage, here via BioChannel.TV.

The Avantium Backstory

Avantium’s YXY technology converts plant-based sugar into chemicals and plastics, including 2,5-furandicarboxylic acid, a precursor to the promising bioplastic polyethylene furanoate.

As the company observed, “In 2011, Avantium was the first company to build an FDCA pilot plant with a production capacity of 15 tons FDCA per annum. This pilot plant enabled Avantium to test PEF through its partners and to continue its process development efforts to improve the economics of the process and strengthen its engineering package in preparation for the scale up to commercial and industrial scale.”

The tempting target that investors could not ignore: Plastics

With 311 million tons produced in 2014, plastics are essential materials in people’s everyday lives. This number is expected to double in the next 20 years and increase to approximately 1 billion tons by 2050. Avantium’s market opportunity is driven by the increasing demand for renewable chemicals and materials, and increasing consciousness around the sustainability of products and production methods.

PEF has improved barrier properties for gasses like carbon dioxide and oxygen, leading to longer shelf life of packaged products. It also offers a higher mechanical strength, thus thinner PEF packaging can be produced and fewer resources are required. The end markets for packaging materials made of PEF represent an aggregate annual turnover of over US$200 billion.

“PEF is strongly positioned to become the next generation packaging material,” said Avantium in the lead-up to the IPO. It is a 100% biobased, 100% recyclable plastic with superior performance properties, making PEF an attractive alternative to PET and other packaging materials such as aluminum, glass and cartons.”

The First Commercial Plant

In the end, the IPO was about raising capital for the first commercial plant. The Joint Venture intends to build and operate the first commercial reference plant for the production of FDCA, the key building block for producing polyesters, such as polyethylene- furanoate (PEF), a 100% biobased and fully recyclable plastic.

The key factor: Partnerships for Progress

What did investors buy into? As we have seen in the past, world-class partners who have bought into the technology and have signaled that, in their view, the technology is sustainable, affordable, reliable and scalable.

In this case, BASF, Coca-Cola, Danone, Toyobo, ALPLA and Mitsui.

In particular, the “whole value chain” set of partners from technology through to customer demand. In the case of companies that arrived on the market in the previous IPO wave of 2010-2012, the partners tended to be more focused on the feedstock and technology side, and there were offtake partners but not so many actual hard money investors visible for companies like Gevo, Solazyme and Amyris that were focused on the higher-value molecules that the companies eventually delivered to market.

What’s Next: Zambezi

Last month, we reported that Avantium,AkzoNobel, Chemport Europe, RWE and Staatsbosbeheer partnered to build a reference plant at the Chemie Park Delfzijl. This important step marks the next stage of a collaborative effort to determine the feasibility of a wood to chemicals biorefinery in Delfzijl. The Zambezi process converts woody biomass into sugars and lignin. It is particularly suited for making high purity glucose required for the production of sustainable materials such as PLA, PEF, PBAT, or PHA).

The Bears have been confounded

On the floor at ABLC last week, there was considerable skepticism that the IPO would succeed.

“I just don’t see it,: went a refrain heard from several high-level industry players. “Raising capital via an IPO for a first commercial plant, it has proven so difficult to maintain the share price for the companies that came out before. It feels early.”

The Multi-Slide Guide to Avantium

We have our multi-slide guide to the company, its technology, partners, progress and future milestones, here.

Just One Word. Plastics: The Digest’s 2017 Multi-Slide Guide to Avantium

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.

March 15, 2017

Index Funds Are Climate Change Denial

Garvin Jabusch

You probably know that index funds have become all the rage in investing over the past several years, as investors flock to their low fees and reject the gospel of active management. But you probably don’t know that investing in a broad-based index fund not only ignores rapid changes in the energy economy but also makes the investor complicit in climate change denial. And just as climate denial ignores the inherent risks of fossil fuels to environment, economy, and society, “set it and forget it” index investing ignores the inherent risks of fossil fuels and related stocks to your portfolio.

If you own an S&P 500 Index fund, you own 65 fossil fuels–related companies. That’s 12.14 percent of the index, or about $12 of every $100 you deposit, going directly into fossil fuels (according to fossilfreefunds.org, which confirms my Bloomberg terminal’s information). This includes producers such as ExxonMobil and Anadarko Petroleum; oil and gas services companies including Halliburton, Schlumberger and BakerHughes; and several fossil fuels–fired utilities like Sempra Energy and FirstEnergy Corp. To boot, you are investing in many of fossil fuels’ project-funding banks (Bank of America, JPMorgan Chase, and Citigroup, the so-called “bankers of extreme oil and gas”), and demand drivers (internal combustion engine manufacturers, coal and gas turbine makers, many of whom, such as Ford, are actively resisting improving mileage standard requirements).

Current conventional wisdom holds that the best and most sensible way to invest in stocks is to buy a broad-market index fund with the lowest fee you can find, and then forget it. More than that, we are conditioned to judge every fund by its performance’s adherence to an index; even non-index funds are routinely judged by how closely they mirror the returns of a major benchmark. The terms “risk profile” and “risk adjusted returns” of a fund usually mean nothing more than a measure of how much (less or more) a fund’s performance varied from a benchmark index. But I would argue that, given the massive risks embedded in the present holdings of indices like the S&P 500, these benchmarks have outlived their usefulness as measures of investment risk, and now present far more portfolio danger than we are led to believe. In short, our yardstick for measuring risk is broken.

How broken? Consider this: In owning that basket of S&P 500 stocks, you are making an active bet that economic growth will be perpetuated by fossil fuel-derived power. This bet is now visibly, clearly not the way forward. As British environmental economist Nicholas Stern recently said, “Strong investment in sustainable infrastructure—that’s the growth story of the future. This will set off innovation, discovery, much more creative ways of doing things. This is the story of growth, which is the only one available because any attempt at high-carbon growth would self-destruct” [emphasis mine]. For its part, and more pointedly, the investment bank division at Morgan Stanley in 2016 advised clients that long-term investment in fossil fuels may be a bad financial decision, writing: “Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels."

What both Stern and Morgan Stanley understand is that the world has changed and our approaches to investment need to change with it.

I won’t belabor a case that’s already been convincingly made (see here, here, and here), but it has become clear that the age of fossil fuels is beginning to end:

  • Costs of renewable technologies continue to plummet while fossil fuels remain volatile commodities
  • Consumers, businesses, and investors are shifting
  • Policies instituted by national governments (led thus far by China and Germany) and local governments (the U.S. state of California, and others)

The decline of fossil fuels will impact investments as much as it will impact any aspect of the economy. The S&P 500 as it’s now constituted is too packed with fossil fuels and other sources of systemic risk to represent any kind of credible reference for calculating safety of returns or expecting to earn them. In terms of the outcomes it promotes, S&P 500 is functionally the same as climate denial. It is time for a new standard.

How do we realize this new standard? We need to recognize that avoiding indexing isn’t just about putting your money where carbon isn’t; it’s now about putting your money where the future is. Think, as an investor, about the outcomes of economic and technological innovation, combined with awareness of the risks of climate change. Where is investment money flowing in response to rapid changes in both? I believe some of the answers include renewable energies, water, sustainable farming practices, efficient transportation, connected cities and grids, AI and machine learning, robotics, biotech, and new approaches to real estate—to name a few.

It is in seeing the world for what it has become, rather than what it was, that investors and markets will allocate capital to manage risks and profit from new opportunities. All of which leads in the opposite direction from fossil fuels.

Enough with the old indices. We should be buying what’s next instead.

This piece was originally published by worth.com at http://www.worth.com/index-funds-are-climate-change-denial/

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha ® Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, "Green Alpha's Next Economy."

March 11, 2017

Rentech's Wood Saw Hits a Knot

by Debra Fiakas CFA

Last week Rentech, Inc. (RTK:  NYSE) revealed plans to idle its wood pellet production facility in Wawa, Ontario Canada.  To operate efficiently the plant requires additional repairs and upgrades beyond the replacement of conveyors that was completed in Fall 2016.  Beside the fact that the additional repairs were not included in the regular capital budget, Rentech management has apparently determined the expenditure is not economic given profits from Wawa.  When Rentech reports financial results for the fourth quarter ending December 2016, shareholders will be treated to an asset impairment charge for the Wawa facility.

Doors Close, Windows Open (then shut again)

The demise of Wawa is symptomatic of broader issues at Rentech, which has had to reinvent itself several times as the renewable energy industry has evolved.  Rentech got its start well over a decade ago pursuing synthetic gas technologies.  The company’s Rentech Process for producing synthetic fuel was thought capable of producing synthetic fuel by gasifying coal.  In 2004, Rentech bought a natural-gas fed nitrogen fertilizer plant in East Dubuque, Illinois and laid out plans to convert it for coal feedstock.  However, by October 2011, fuel projects in Rialto, California and Natchez had to be scrapped.  The company had planned to produce drop-in synthetic fuel from landfill waste at Rialto using Rentech’s proprietary application of Fischer-Tropsch technology.  Just a few months later in March 2012, Rentech abandoned its coal-to-liquid plant and later sold its land holdings in Natchez, Mississippi.

In March 2013, Rentech shuttered its product demonstration unit located in Commerce City, Colorado and terminated research and development on advanced biofuels.  With the syngas effort behind it, Rentech quickly moved on other opportunities.  In May 2013, the company acquired Fulghum Fibres, a processor wood fiber with 32 wood chipping mills strung out across the U.S. and South America.  Rentech had its eye on the market for wood pellets to be used as a low-carbon alternative to coal feedstock in power generation plants.  Unfortunately by 2015, the company was forced to begin writing down the value of its wood pellet inventory as the realizable fell under question under evolving demand and pricing conditions.  Now those economic conditions have forced the shutdown of the Wawa wood pellet operation.


Some of Rentech’s early strategic moves have eventually proved fortuitous.  By 2011, all the company’s revenue was from sales of fertilizer products made from natural gas at the East Dubuque, Illinois facility.   In November 2011, 39% of the fertilizer operation, the Rentech Nitrogen Partners, was sold through a public offering of its common units.  The company received $276 million net of costs that was promptly used to retire term loan.  Then in early April 2016, another fertilizer producer, CVR Partners (UAN:  NYSE) acquired all the common units for $2.67 per share, retiring the units Rentech Nitrogen Partners from public trading.  Rentech received $59.8 million in cash and 24.2 million CVR common units valued at approximately $142 million in the bargain.  Again Rentech promptly distributed cash and some of the securities to repurchase $100 million in preferred stock and retire $41.7 million in debt obligations.  Altogether Rentech received $477 million for its interests in Rentech Nitrogen Partners.  Considering that the company paid $63 million for the business in 2004, the returns have been impressive.

After all the deal making, acquisitions and divestitures, at the end of September 2016, the last balance sheet disclosed by the company, Rentech had total equity of $278.1 million.  The company has taken in $533.2 million in equity altogether, but losses over the years have accumulated to $255.1 million.  The company has used leverage over the years, but long-term debt has been reduced to $125.9 million.  The debt-to-equity ratio is now a relatively placid 0.45.

While Rentech has improved its balance sheet, its assets appear to go underutilized.  Return on assets and return on equity are both negative based on recent financial performance.  The net loss was $127.7 million or $10.42 per share on $287 million in total wood pellet sales in the twelve months ending September 2016.  Even excluding discontinued operations, net results were negative.  Indeed, positive returns from its renewable fuel operations have eluded Rentech. Only when the company was producing fertilizer did Rentech generate profits.

Disappointing operating performance appears registered in the RTK price.  Rentech equity is valued at just $20 million and its enterprise value is near $106.2 million.  Some investors might argue that at a stock price less than $1.00 per share, RKT is a bargain against its total assets of $470.1 million.  Then there is that looming Wawa asset write-down and the possibility of additional charges to reflect the demise of yet another misstep in Rentech’s travels through the renewable energy market.

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.

March 06, 2017

Juhl Energy Diversifies

by Debra Fiakas CFA

Renewable energy producer Juhl Wind filed to terminate registration of its common stock and cease filing financial reports with the Securities and Exchange Commission in September 2015, but the company was not withdrawing from the wind energy industry.  Instead Juhl expanded.  Now called Juhl Energy (JUHL:  OTC/PNK), the company’s corporate website boasts of its corporate headquarters in Minnesota powered exclusively by wind and solar energy.  The company also claims the successful development of over 350 megawatts of wind power generation capacity at 25 different wind projects.  Additionally, the company has dipped its corporate toe into biomass energy and natural gas systems.

After keeping a fairly low profile over the last two years, Juhl is making headlines again. The company is developing a mixed-source project in Red Lake Falls, Minnesota that is expected to be the first commercial solar-wind power generation source in the U.S.  When construction is complete in August 2017, there will be two 2.3 megawatt wind turbines and 1.0 megawatt solar conversion capacity.

Juhl is making small, community-based energy development like the Red Lake Falls project the focus of its business strategy.  The company recently sold several of its renewable energy assets to ConEdison Development, including three operating wind projects in Minnesota and Iowa with a total of 36 megawatts generating capacity and additional interests in various wind power projects with a total of 500 megawatts capacity.
Going forward Juhl plans to focus on renewable energy projects under 20 megawatts.  The company’s standard design for mixed-source power generation from wind and solar is expected to be a key offering.  The company sees demand for smaller projects in the 5 megawatt size from rural communities, small municipalities, industrial complexes and commercial campuses.

At the time of the asset sales, management expressed optimism about the ability of the company to grow with this new, more focused strategy, as proceeds of the asset sales could be used to pay down long-term debt.  However, no details have been made public.  Investors are left to guess about Juhl’s balance sheet.  The company has not filed financial statements for two years.  The last balance sheet filed in August 2015, indicated Juhl held $1.6 million in cash and had $15.9 million in long-term and non-recourse debt.

Juhl is not entirely cut off from investors.  Besides entertaining questions from the public, until recently the company accepted investments in preferred stock in a subsidiary called Juhl Renewable Assets.  The preferred stock gave investors a stake in Juhl’s solar and wind power projects.  Those preferred shares were redeemed at par when the assets were sold to ConEdison Development.

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.

March 03, 2017

Can Panasonic Produce High Efficiency Solar Modules at Tesla's Gigafactory 2 in 2017?

EDITOR'S NOTE: Yesterday, Tesla (NASD:TSLA) announced that it has no intention of using Silevo's technology at "Gigafactory 2," the former Silevo facility in Western New York, now owned by Tesla through its acquisition of SolarCity.  This makes some background on Panasonic (Whose technology Tesla plans to rely on instead) in this month's Solar Flare particularly relevant.

Panasonic recently announced that the New York Facility would be operated under the name Panasonic Eco Solutions Solar New York America (PESSNYCA?) and that equipment will be installed and production will begin by summer 2017.

In 2014 SolarCity acquired Silevo and broke ground on its New York Giga-factory promising that it would begin high volume production as early as 2016. This was an announcement doomed to retraction from the outset given that breaking ground and construction are not synonymous.

In 2015 SolarCity announced that it would produce modules in its New York facility by 2017 that would be 30% more efficient than the modules it was currently producing even though it was not producing any modules at the New York facility and Silevo was operating as a module assembler in China. Also in 2015 SolarCity leased the former Solyndra manufacturing facility in Fremont a move that at least finally (finally) got rid of the Solyndra sign and the constant reminder of this fiasco.

In 2016 SolarCity announced that the champion modules produced in Fremont by Silevo had reached 22% conversion efficiency. Note, champion efficiency and commercial efficiency are not the same thing. Given the 2015 announcement that it would increase its nonexistent module efficiency by 30%, did SolarCity mean that in 2017 it would produce modules of >28% efficiency in New York using the Silevo technology? This is both unlikely and, well, it’s more than unlikely. And now SolarCity/Tesla and Panasonic have announced that Panasonic will produce high efficiency cells and modules in New York by mid-2017. This is also unlikely.

Well, it’s more than unlikely.

Comment: Panasonic’s cost structure is not a good fit for manufacturing in the US. Given the crash dive in prices and the forces holding prices down it is difficult to see the new announcement in a positive light.

Lesson: This latest announcement may end up to be no more than an announcement but it will be repeated as progress before PESSNYCA turns out even one module. The lesson is not to put too much credence in announcements or in long company names that cry out to be acronym-ized.

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 SPV Reaserch's monthly newsletter, the Solar Flare, and is republished with permission.

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