Waste-to-Energy Archives


January 05, 2017

Carbon Negative Impacts from Biomass Conversion

By Andrew Grant, Biomass Power Projects, LLC, Lee Enterprises Consulting

Canada, New England, and California all have Carbon Credit programs to achieve GHG reduction goals. Several forms of biomass diversion from landfills, farms, and other biomass – dependent GHG sources are already in operation to support significant GHG reductions. Examples of GHG reductions are given, and the carbon impact of the different commercially available biomass to GHG reduction processes are described.

The three groups of commercially guaranteed biomass conversion processes are:

1. Power Generation, Steam Generation, and CHP: from the combustion of biomass wastes. This industry, with about 100 independent units in operation in the US, is based upon pulp mill technology and includes fluid beds, pulverized fuels, and suspension grate technologies matched to well-proven emissions controls. High pressure steam is generated and drives turbines to make power.

While fluid beds can use fuels up to 65 % water, e.g. sludges, most units use waste woody biomass from a variety of sources, and provide an important regional waste disposal service in the Circular Economy. The GHG reduction is site specific – landfill diversion of biomass is strongly GHG Negative, while 100 % forestry waste fuel is approximately GHG neutral.

2. Anaerobic Digestion: AD is firmly established as the leading method of converting high moisture content organic wastes first to methane-rich gas, thence to power, pipeline gas, CNG / LNG. AD’s lower conversion efficiency and higher specific capital cost is offset by a consistent GHG reduction due to the sources of its biomass feedstocks, and in many cases by wider socioeconomic benefits in disposing of wastes.

3. Thermal Conversion to Hydrocarbons: This category includes simple pyrolysis, classical and advanced gasification processes, and direct catalytic conversion, with end products ranging from crude distillate oils, synthesis gas for all applications, and catalyst-tailored products. These processes generally have a high conversion efficiency, and their GHG reduction impact is largely a function of their biomass sources.

Power Generation, Steam Generation, and CHP

Over 100 US biomass Independent Power Producers, and our many biomass industrial and municipal Combined Heat and Power generators, do not grow and burn trees – they cannot afford to do so at current power prices. They all use some form of waste biomass fuel, often diverting the wastes from landfills. They cannot afford to plant and harvest either trees or other ‘energy crops’, even though such plantations have been tried.

The range of waste biomass fuels is wide – forestry wastes, including sawmill wastes, wastes from wood products manufacturing, non-recyclable waste paper, recycled paper mill wastes and sludges. In addition, biomass plants use wood waste diverted from municipal landfills to avoid methane generation, clean wood from construction and demolition sites, utility transmission line right-of-way clearance and urban tree removals – a huge volume. Finally, there is process waste from biodiesel and cellulosic fuels and chemicals production, agricultural wastes, straw and husks from grain crops and grain processing.

Some biomass plants, such as municipal Waste-to-Energy plants, combine recycling with power generation. The US has about 80 WtE biomass power plants, operating in compliance with emissions regulations. These third generation WtE plants, like those in Europe and the newer WtE plants being built in China, exhibit high reliability and extremely low emissions as the result of several decades of continuous process improvement.

The carbon footprint of biomass power plants is generally neutral as determined by UE EPA and US Department of Energy. Each location should calculate its own particular carbon footprint. Some biomass power is strongly carbon-negative, owing to the reduction in landfill methane emissions when biomass is diverted, even with landfill gas recovery, as shown below. Additional reductions in carbon footprint can be achieved by the use of biodiesel and renewable LNG or CNG in trucks and equipment – a growing trend.

Carbon Negative – a Simplified Calculation.

Dry wood consists of a mixture of cellulose, hemi-cellulose, and lignin. The ash-free chemical composition of wood can be represented either as C6H(H2O)6, or more simply as CH2O. CH2O is used below for the approximate calculation of the amount of methane, CH4, and carbon dioxide, CO2, that is released from a landfill when woody material undergoes anaerobic decomposition. Anaerobic decomposition is the result of the exclusion of air, the presence of water, and the presence of anaerobic and methane-forming bacteria, similar to the conditions in a swamp where methane, or marsh gas, is generated.

2 CH2O (water, bacteria), 2 x 30 = CH4 ,16, + CO2 , 44

One ton of dry, ash-free, wood in a landfill produces:

0.27 ton CH4

Plus 0.73 ton CO2

The typical 25 MW biomass power plants use from 1.05 to 1.1 dry ton of wood per net MW-hour; using 1.05 tons/ MWhr:

One MWhr of biomass power from diverted biomass avoids the formation of 0.28 tons of methane in a landfill.

As a GHG gas, methane is approximately 21 times as powerful as CO2. So one MWhr of diverted biomass power avoids the release of approximately 6 tons of CO2 equivalent, plus the CO2 also generated for a total of 6.7 tons of CO2 E per biomass MWhr.

However, most landfills practice landfill gas recovery. The EPA model uses a default value of 50 % LFG recovery when calculating emissions, but it is assumed that in southern California – the origin of LFG recovery technology – LFG recovery is approximately 65 %, as advised by SCS Engineers and industry sources. Therefore the net emissions of methane to the atmosphere are approximately:

0.28 tons CH4 / MWhr x 35 % net emitted = 0.1 ton of methane emission avoided per Biomass MWhr, or 2.1 tons of CO2 equivalent.

Wood waste deposited in a C&D landfill will generate LFG more slowly than in an MSW landfill, but typically there will be no LFG recovery at a C&D landfill. Once water accumulates, and oxygen is depleted, anaerobic decomposition will take place, yielding 6 – 7 tons CO2E per biomass MWhr.

Waste paper is lignin-free wood, and decomposes in the same way, but more rapidly than woody material.

If a given facility uses 50 % landfill-diverted biomass, and 50 % carbon-neutral forestry waste, then a pro rata calculation of the negative carbon impact can be used to calculate the Carbon Credits so created.

A typical 25 MW biomass power plant, using 100 % landfill diverted biomass, prevents the emission of about 1.2 MM tons per year of CO2 equivalent.

A typical 60 MW, 2,000 ton MSW/day waste to energy plant, where 100 % of the biomass fraction of the fuel avoids landfill decomposition, prevents the emission of about 2.9 MM tons/yr of CO2 equivalent.

Anaerobic Digestion

Most AD feedstocks would be converted to methane and CO2 if not so processed, therefore the above simplified calculation may be applied, with adjustment for the individual MAF organic analysis. Loss of carbon to digestate affects the overall carbon conversion efficiency of the particular AD process, but does not affect the negative carbon impact due to conversion. Negative carbon impact must be calculated on the MAF content of the feedstock, then converted to wet tons, or to gallons.

The additional socio-economic impact of many AD projects which eliminate the discharge of livestock manures and their consequent damage to rivers, lakes, fisheries and tourist business should be added to their negative carbon impact.

Although the carbon conversion efficiency of most AD processes is significantly lower than that in a combustion boiler, the heat rate of the gas engine gensets used for AD is better than that of a biomass boiler/steam turbine, such that an AD plant has negative carbon impact of about 5 tons of CO2 E per MWhr, compared to the 6.7 tons CO2 E for the solid biomass system. Care must be taken to define the alternative decomposition pathway of each part of the AD feedstock in calculating this value.

A typical 5 MW AD facility, using 100 % feedstock that would otherwise generate methane emissions, prevents the emission of about 200,000 tons per year of CO2 equivalent.

Thermal Conversion to Hydrocarbons

There are about a dozen commercially guaranteeable biomass conversion systems available. Some are equipped to handle MSW, others are limited to less-corrosive forestry wood wastes. In all cases, the negative carbon impact can be calculated from the feedstock analysis and the alternative disposal of that feedstock in the absence of the project.

A good example is the Edmonton, Alberta, Enerkem project which converts 100,000 tons/yr of RDF from MSW into approx 440 bbl/day of hydrocarbon, using a classic oxygen blown gasification process followed by gas clean-up and methanol synthesis.

Gasification processes have excellent carbon conversion efficiencies; if the resulting syngas is used in combined cycle power generation, a very efficient overall system results. But the carbon impact is based upon the feedstock consumption, not the MW output, so a lower negative carbon impact per MWhr than for a conventional boiler/turbine is the result.

The Enerkem Alberta project has a negative carbon impact of about 550,000 tons/year of CO2 equivalent, based upon 100 % of its feedstock being diverted from landfill.

Andrew Grant has a B.A. and M.A. from Cambridge University and over 35 years’ experience as a manager of biomass conversion projects. He has been involved in providing guarantees of performance, environmental impact and cost studies, for coal and biomass conversion technologies, and has performed due diligence studies of technologies and of facilities. Andrew is familiar with a wide range of biomass processing, ranging from wood chips to rice straw to MSW, and is experienced in greenhouse gas reduction and carbon footprinting, in the use of waste biomass, and other emerging technologies.

This article was originally published on Biofuels Digest. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

February 09, 2016

N-Viro: Sludge Into Fuel

by Debra Fiakas CFA

After ethanol producers figured out that pricey feedstock could rapidly erode profits, the renewable energy industry began casting about for alternative feedstock.  What is cheaper than ‘free?’  Waste of all kinds  -  sewage, mixed municipal trash, animal manure, food and agriculture waste, wood pulp, exhaust gases, steam  -  can be virtually free.  Sometimes waste generators are even willing to pay a fee to anyone willing to accept their nasty stuff.

N-Viro International (NVIC:  OTC/PK) is one of those renewable fuel producers with its arms wide open.  The company has lengthy experience in treating wastewater using its proprietary conversion process.   The waste streams are subjected to mineral by-products that have an alkaline reagent that stabilizes and pasteurizes.  The process generates an odor-free ‘soil’ that improves harvests.  N-Viro has been producing this agricultural and gardening product for over twenty years.

Image result for n-viro image
More recently N-Viro has jumped into the alternative energy race with a patented biomass fuel that hashe characteristics of coal.  The production process accepts all sorts of feedstock from livestock manure to food waste to paper sludge to municipal waste.  The pelletized fuel can be blended with coal to achieve better energy results than coal alone.  N-Viro’s fuel is also environmentally-friendly with a lower sulfur emissions profile.
The company has quite a bit to offer the coal-fired power plant owner.  N-Viro’s fuel production process gives off ammonia, which can be used by the power plant for removal of nitrogen oxides from the plant’s exhaust gases.

With apparently excellent products investors could expect N-Viro to find rapid traction in the market.  Unfortunately, market penetration appears to be woefully weak.  The company recorded $1.3 million in total sales in the most recently reported twelve months ending September 2015.  Worse yet still is that the net loss was $2.0 million.  Revenue has been higher.  The company reported $3.6 million in total sales in 2012, but the top-line has been slipping downward ever since.  There have been no profits.

Operations have used $1.6 million in cash over the past four years to keep the doors open.  That is not a significant sum and it is clear the company has been operated with a frugal hand.  However, there was only $25,000 left in the bank at the end of September 2015.

That is why the company’s recent announcement to work with the Zhejian Jiangxing Sewage Treatment Facility in the City of Jiaxing, China might be of vital importance.  The treatment facility produces 550 metric tons of wet sludge every day and there are plans to triple capacity.  N-Viro has agreed to construct and operating a processing facility to turn the sludge of Jiaxing into N-Viro fuel.

Nothing ever happens quickly in China, but N-Viro may have stumbled on a gem in Jiaxing City.  Since the announcement in late September 2015, the company has been silent on plans for working and investment capital.  Shareholders are likely keeping their fingers crossed that its ‘Jiaxing gem’ can be used as collateral.

NVIC is quoted on the Over-the-Counter Pink Sheets, which likely presents a problem for many investors.  On the plus side, N-Viro files financial reports with the SEC just like any listed company.  The stock trades well below a dollar per share and that might seem tempting to some more adventurous investors.  Even so, the bid and ask spread is wide.  That means a long position will be met with immediate loss of value in their account just on the spread.  What is more trading volume is shallow and getting out of the position in a hurry is not likely possible.

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. AMRS is included in Crystal Equity Research’s Beach Boys Index of companies developing alternative energy using the power of the sun.

October 12, 2015

Blue Sphere To Start Biogas Commercial Operations

by Debra Fiakas CFA

The Blue Sphere, Inc. (BLSP:  OTC/QB), stock price has weakened in recent months as investors registered their apparent frustration with fundamental developments.  Proposed acquisitions of operating biogas power plants in Italy have taken much longer than expected and majority interest in planned biogas plants in the U.S. were sold into joint venture arrangements rather than held as 100% equity positions.  Despite these developments, Blue Sphere management has doggedly moved forward on all fronts and there has been measurable progress toward first revenue.

Commercial operation dates have been set for Blue Sphere’s first two biogas development projects in the U.S.  Construction progress is on-schedule for a 5.2 megawatt biogas power plant near Charlotte, North Carolina.  The facility is scheduled to be connected to the local electrical grid on October 27, 2015.  Likewise construction is on-schedule for a 3.2 megawatt biogas power plant in Johnston, Rhode Island.  The Johnston plant is on the calendar for connection to the local power grid the third week in December 2015.  Both plants deploy anaerobic digestion equipment to convert food waste to energy to heat steam-powered turbines and electrical generators.

Blue Sphere lined up Austep, S.A. of Italy to supply the digestion and generation equipment for both the North Carolina and Rhode Island plants.  Austep has also agreed to operate both plants once construction is completed and has provided performance guarantees to the Blue Sphere and its joint venture partner in the two plants, York Capital.  Food waste supply agreements for both plants have been secured and tipping fees to the joint venture have been finalized.  A 15-year power purchase agreement with Duke Energy (DUK:  NYSE) is in place for the North Carolina electricity output and a similar agreement has been secured for the Rhode Island plant.  Additionally, McGill Environmental has signed a 10-year off-take pact for compost by-product of the anaerobic digestion process.

Once operational, Blue Sphere will claim 25% and 22.2% of the profits from the North Carolina and Rhode Island joint ventures, respectively.  Since construction of both plants is near completion, and connection to the electrical grid and power purchase agreements are in place, we expect both plants to begin contributing to financial results in fiscal year 2016.

Progress has also been made in Blue Sphere’s bid to acquire fully operational biogas powered plants in Italy’s famed Lombardy agricultural region.  The final due diligence and legal arrangements have been completed, clearing the way for Blue Sphere to close its pending purchase agreements to acquire the four plants.  All four plants will be 100% owned by Blue Sphere and are expected to contribute revenue beginning in fiscal year 2016.  Each plant is separately operated, producing 999 kilowatts that is being transmitted to the contracted power purchaser Gestore del Servizi Energetici, S.p.a., through Italy’s regional power grid.  Biogas equipment supplier and operator, Austep, has been signed to operate each plant.  Pending completion of legal and financing arrangements, Austep is monitoring operations at each of the four plants.

Our most recent research report on BLSP still cites shallow trading volume as a potential securities risk for investors in the stock.  However, the report also notes that average daily trading volume has increased to 1.2 million shares per day over the last six months compared to about 800,000 in the previous six months.  This is an encouraging development that signals rising investor interest and more efficient valuation of the stock.  The report also noted that management has made progress in reducing debt, albeit at the expense of shareholders through the dilutive impact of debt converted to common stock.  Thus the stock at its current depressed price remains an interesting option on management’s execution success.

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.  BLSP is featured in research reports published by Crystal Equity Research.  Please note the important disclosures at the end of all Crystal Equity Research reports.  Please read the important disclosures related to sponsorship and subscriptions in the final pages of all reports.

October 01, 2015

Covanta: Comfort In An Ample Dividend

by Debra Fiakas CFA

In late August 2015, volatility turned its frightening countenance on the U.S. equity market.  The volatility measure for the S&P 500 Index (VIX) spiked to a peak of 53.29 during trading on August 24th.  While things have calmed down since, volatility remains well above the 20.00 level where many investors consider it too precarious to take new equity positions.  At time like these it makes sense to seek the warm comfort of an ample dividend.  Those regular cash rewards can make it worthwhile waiting for stock prices to calm down.

Within the renewable energy sector Covanta Holdings, Inc. (CVA:  NYSE) is a strong candidate for dividends.  At the current price level, CVA is yielding 5.2%, making it one of the best dividend payers in our indices of renewable energy, efficiency and conservation companies.  Will Covanta be able to sustain its generous payments?

Covanta’s revenue comes from the sale of electricity and steam generated by 46 waste-to-energy facilities strung out across the country.  There are another 11 power generation sites that use biomass or hydroelectric technologies.  The company also sells metals recovered from the municipal waste it uses as feedstock.  In the twelve months ending June 2015, Covanta reported $1.6 billion in total sales, from which it squeezed $229 million in operation cash flow.

Indeed, Covanta consistently extracts cash out of its operations even in years when it reports a net loss on its income statement.  In the last three years average cash flow from operations was $333 million.  With average capital expenditures near $175 million, Covanta has had about $158 million in operating cash available in recent years to pay its dividend.

Even if times turn bad for the waste-to-energy business, Covanta has a fairly secure financial situation.  At the end of June 2015, the company had $167 million in cash on its balance sheet, which is probably enough to support working capital needs.  The company also has $410 million in long-term investments that could be cashed in if the need arises.  Covanta does have long-term debt totaling $2.4 billion.  However, the debt is balanced by $2.6 billion in property, plant and equipment assets.

Covanta has cultivated a good following among analysts interested in the renewable energy industry.  The consensus estimates suggest Covanta is in a relatively stable situation.  The company has been experiencing some top-line and margin pressures and it appears sales and earnings in the year 2015 will be lower than last year.  Covanta did miss the earnings consensus in both the March and June 2015 quarters and analysts lowered expectations for the rest of 2015 and the year 2016 after the June quarter disappointment.  However, there is still some optimism for recovery next year and the current consensus for both sales and earnings suggests mid-single digit growth in 2016.

After Covanta reported disappointing results for the quarter ending June 2015, traders have been bidding the stock down.  Just last week CVA registered a 52-week low price of $18.05.  The stock now appears oversold.  That might be a call for some bargain hunters to take new long positions.  However, like so many stocks in the U.S. equity market CVA appears to have lost its upward momentum.  For investors interested only in growth that is not a compelling scenario.  The dividend could make the wait for recovery a lot more pleasant.

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. 

September 01, 2015

Blue Sphere's Eyes On The Horizon

by Debra Fiakas CFA

Renewable energy companies have to worry about flagging commodity prices that make it even more difficult to prove the competitive potential of alternative fuels, as well as possible disruption in the capital markets and valuation multiples which are concerns of all public companies.

Shlomi Palas, the CEO of  Blue Sphere, Inc. (BLSP:  OTC/QB), a microcap in the Crystal Equity Research coverage group, is not dissuaded.  He continues to push forward with the company’s strategy to own and operate biofuel-powered, grid-connected generation facilities.  Blue Sphere has two food-waste-to-energy plants under construction in the U.S. in North Carolina and Rhode Island.  The company is also pushing forward with two additional ‘greenstart’ biogas plants.  Management is working to secure a power purchase agreement for a 5.2 megawatt plant planned near Middleboro, MA, where local governments are keen on keeping food waste out of landfills.  Another waste-to-energy biogas plant is planned near Ramat Chovav, Israel.  The project would for the first time give Blue Sphere an operating presence in its home country. 

It is never easy for developmental-stage companies like Blue Sphere to bring the vision into focus for investors.  With first electricity sales from its North American projects still months away, Blue Sphere is buying four operating biogas plants in Italy, each with a capacity of one megawatt of power and each with a strong power purchase agreement in place.  With closing the Italy plants could deliver Blue Sphere’s first sales to its top-line.  In the company’s quarterly financial report management reveals the continued, but quite protracted odyssey to closing.
Blue Sphere has arranged financing for the Italy power plants acquisitions, putting it in 100% ownership of the plants.  However, to move forward with the two North American food-waste-to-energy projects, the company entered into a joint venture with a U.S. investment fund.  In the end Blue Sphere will lay claim to 25% and 22.5% of the North Carolina and Rhode Island joint ventures, respectively.  The arrangement might have been disappointing to some shareholders who had expected Blue Sphere to retain equity control over the projects.  However, the reality of U.S. capital markets in general and renewable energy financing in particular, has been challenging. 

In 2014, there had been a 17% increase in world renewable energy investment, bringing total new capital to $270 billion for the year.  This was just short of the peak in global investment of $279 billion reached in 2011.  The rebound was due in part to the achievement of an inflection point of sorts.  In 2013, the world added 143 gigawatts of renewable electricity capacity compared to the addition of 141 gigawatts of new plants that burn fossil fuels.  It was the first time that renewable fuel additions outpaced fossil fuel additions.  Bloomberg Energy Finance group estimates renewable energy additions could grow by more than four times by the year 2030, leaving new fossil fuel power plants far behind.  The trend is driven in part by the dramatic decline in the price of wind and solar power sources.
However, in the near-term the falling price of oil has given some investors pause in considering biofuel alternatives for power generation.  It is clouding the investment pitches made by executives like Palas who head up smaller, unproven companies.  It is vital to keep perspective.  In the long term oil, at least oil that is paying its way in environmental cost, cannot compete with renewable fuel sources for power generation.

Oil may be at a low in its cycle and that may be impacting world business.  The specter of oil barrels being sold off for $40 may have rattle some enough to divest of U.S. equities.  However, the entrepreneurial spirit keeps the eyes of Palas and his fellow biofuel development colleagues glued to the horizon, where the price of oil has no relevance in a world powered by renewables.

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.  BLSP is featured in research reports published by Crystal Equity Research.  Please note the important disclosures at the end of all Crystal Equity Research reports.  Please read the important disclosures related to sponsorship and subscriptions in the final pages of all reports.

July 05, 2015

Blue Sphere's First Revenue

by Debra Fiakas CFA

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

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

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

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

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

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

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

February 20, 2015

The Light On Blue Sphere's Horizon

by Debra Fiakas CFA

The stakes were high at the beginning of its fiscal year 2015, as Blue Sphere, Inc. (BLSP:  OTC/QB), a developer of waste-to-energy projects, was facing deadlines to fulfill its contractual commitments to the sellers of its two ‘front burner’ waste-to-energy projects in North Carolina and Rhode Island.  In the four intervening months it appears Blue Sphere has won all bets.

Blue Sphere had purchased a biogas project from original owner Orbit Energy and had received an equipment financing commitment from Caterpillar.  Unfortunately, an equity financing source withdrew its interest as a year-end 2014 deadline drew near to make a final payment.  Behind the scenes in the final months of 2014, Blue Sphere was able to forge a new alliance with York Capital Management and its subsidiary York Renewable Energy Partners.  

The alliance was formalized through a new limited liability company, Concord Energy, in which York holds 75% interest and Blue Sphere owns 25%.  The original purchase agreement Blue Sphere had struck with Orbit Energy to buy the Charlotte project was allowed to expire and the new Concord Energy JV bought the project.  York will be responsible for financing the remaining development budget.  The original project budget totaled $27.3 million, of which the anaerobic digesters and related plant equipment represents the largest portion at $17.4 million.  Blue Sphere will be responsible for bring the project to commercial operation sometime before the end of 2015.
Source:  Austep SpA, a Blue Sphere equipment supplier and contractor

The deal is transformative as it appears to put Blue Sphere on track to have an operational biogas plant in the Unites States by the calendar year-end 2015.  Management indicates it has been so confident in the Charlotte project that they had continued to work closely with its engineering firm to break first ground.  A food waste supply agreement and an electricity off-take agreement remain in effect.  Accordingly, if the plant is commissioned on schedule, we expect the project to contribute income beginning in second fiscal quarter 2016.  Preliminarily, an estimated $1.0 million per year could be added to annual pre-tax income from the Concord Energy JV.
Blue Sphere is also working with York Renewable Energy Partners on a similar joint venture for a food waste-to-energy project in Rhode Island.  That deal is expected to close by the end of February 2015, with terms similar to those struck for the North Carolina project.  If completed on schedule, the Rhode Island project could contribute to Blue Sphere income by second half fiscal year 2016.

Management has made progress with the pending acquisition of four biogas facilities in Italy.  Due diligence has been completed and Blue Sphere has lined up financing from an Israeli private equity fund.  Thus closing appears possible within the March 2015 quarter.  After the closing Blue Sphere will own a 70% share of the Italy biogas plants, which are reportedly fully operational and profitable at one megawatt in electricity generation.  The Italy biogas plants could contribute to sales and earnings beginning in the fiscal third quarter ending June 2015.

Blue Sphere appears poised to move from development to operating stage with the pending acquisition of fully operational biogas power generation plants in Italy.  Upon closing the Company may report its first revenue and earnings from power sales as early as the quarter ending June 2015.   The report of sales and earnings should have an impact on valuation as investors gain confidence in management to deliver promised results.   We also expect announcements related to progress on the Company’s two most advanced development projects in North Carolina and Rhode Island to have a catalytic impact on sentiment toward the Company.

At the current price level, the stock is valued much like an option on management’s ability to execute on strategic plans.  However, upcoming milestone announcements are expected to shift valuation to earnings.  In a research report recently published by Crystal Equity Research, BLSP was a speculative security and therefore appropriate only for investors with strong tolerance for risk and price volatility.  More details on these recent developments and the company’s most recent financial report can be found in the report.

If Blue Sphere can reach operating stage and begin report sales and earnings, it could have a salutary effect on the biogas sector.  There are few public companies in the sector in the first place and even fewer that have operations of significance.  Even for those investors for whom BLSP presents more risk than accommodated by their investment temperament, Blue Sphere is worth adding to a watch list of the biogas sector.

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

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

November 25, 2014

MagneGas' Industrial Plasma

by Debra Fiakas CFA

Alternative chemicals developer MagneGas Corporation (MNGA:  Nasdaq) is posting another guard at the gate.  The company recently filed a patent application to protect new enhancements of its plasma arc technology and gasification system.  Plasma is any gas taken to a whole new phase through extremely high temperatures.  For perspective the sun is actually a very large ball of plasma.  Here on Earth MagneGas is using its proprietary system to gasify carbon-rich liquids such as municipal wastewater to produce hydrogen gas for industrial applications and vehicle fuel. 

Many investors have probably heard about plasma gasification technology and might be wary that there is little to differentiate the MagneGas system from everyone else.  Granted MagneGas is not the first to use a plasma torch powered by an electric arc.  The electric arc provides a spark to ionize a gas and perform an operation like cutting metal.  Electric arc welders, torches and furnaces are widely used in manufacturing construction and solid waste treatment.

However, MagneGas has a lengthy history with plasma arc technology.  The company’s engineers have figured out how to maintain a stable electric arc under water.  Organic matter in the water is catalyzed by the electric arc and turned into a usable gas product.  The company calls it ‘submerged electric arc’ and already has received patent protection for their unique application, process and design.  MagneGas management touts its submerged electric arc innovation as more effective than vacuum or air electric arc technologies, especially when it comes to liquid wastes.

Technology Turns into Product with Large Market Opportunity

The company is using its plasma gasification system called Venturi to process waste water into a hydrogen-based alternative fuel.  The fuel is sold under the brand MagneGas2 as a substitute for natural gas to power industrial equipment or as an alternative to acetylene.   A highly flammable colorless gas, acetylene is put to wide use by industry, principally as feedstock for production of chemicals like butanediol.  However, acetylene is also commonly used for welding applications and metal cutting because of its high flame temperature.  The automotive, aerospace and glass industries are big consumers of acetylene.  Yet even these industrial users are sensitive to acetylene’s origins from hydrocarbons via calcium carbide (coke) or from methane combustion and the greenhouse gases that are emitted during the production steps.

MagneGas2 has been well received by the metalworking market because it is over a third faster than acetylene.  Using MagneGas2 also reduces the oxygen requirement, saving industrial customers time and money on the job, not to mention improving safety conditions for workers.  The company is planning demonstrations of MagneGas2 at trade shows to build awareness and interest.  To accelerate the penetration of the industrial market, MagneGas recently acquired a well-established gas distribution company based in Florida.  The plan is to cross-sell MagneGas2 to the distributor’s customers.

The company has a challenge ahead.  The acetylene market is highly concentrated and dominated by a few well-established suppliers, which compete intensely on price.  Air Products and Chemicals (APD:  NYSE), Linde AG (LIN:  DE) and Praxair (PX:  NYSE) are the incumbent acetylene suppliers, from which MagneGas will need to grab some market share by converting users of acetylene to MagneGas2.

Additional Markets

Management has additional markets in its sights.  The technology can also be used for sterilization so waste streams can be treated and re-used or safely disposed.  Plasma processing of waste is ecologically clean and the lack of oxygen in the process prevents formation of toxic materials.  An alliance with Pioneering Recycling has been struck to gain access to the medical waste market, where contaminated organic matter is a common problem.  The alliance is planning to use the Venturi system in sterilization mode to efficiently and effectively treat liquid medical wastes.

MagneGas has also teamed up with Future Energy in Australia to target the energy market.  An unnamed third party has been lined up to help with a demonstration to prove the viability of co-combusting MagneGas2 at a coal fired power plant.  The expectation is for higher electric output and reduced emissions.

Interested parties can also buy the equipment used to gasify liquid wastes such as chemicals or sewage.  The company is prepared to sell its plasma arc flow refinery in various sizes from 50 kilowatts to 500 kilowatts at about $10,000 per kilowatt.  Sales of the refinery system have been far and few between and do not seem to be a promising revenue source for MagneGas without a more serious business development effort.   

Better Mouse Trap at Bargain Price

It appears MagneGas really has invented a better mouse trap in the form of ‘submerged electric arc’ technology, but investors have yet to acknowledge the earnings potential of the invention.  Then again valuation is challenging.  The company has recorded revenue from early sales of MagneGas2 as well as development contracts, but the company has yet to post a profit.  In the most recently reported twelve months sales totaled $1.1 million resulting in a net loss of $6.8 million.  Accordingly, MNGA is valued at 27.5 times sales and its price-earnings multiple is negative.  

MNGA shares are trading below one dollar per share after backing down from a 52-week high stock price of $2.45.  The retreat in the share price might seem appealing for the bargain hunters.  However, investors interested in MagneGas technology will need to be patient in waiting for the company’s market penetration strategy to bear fruit.  The business model probably will take at least two to three years to unfold.  Thus watching quarterly results could get frustrating for investors with a need for fast action.  Trading volume in MNGA shares has built up to about 250,000 shares per day, helping to narrow the bid-ask spread to just under a penny.  Nonetheless, the stock is relatively volatile as measured by a beta of negative 2.80.   A long position in MNGA could quickly show a loss  -  at least on paper.

Surprisingly given the modest profile of this emerging business, a sizeable short position has built up in MNGA shares equal to about 1.3 million or 6.3% of the shares not held by insiders.  If the naysayers are proven wrong about MagneGas, the stock could get a boost higher as traders have to buy shares to close out their losing short positions.

In the meantime, patient investors might consider a reasonable case for sales, earnings and valuation for MagneGas based only on the market potential of its most developed product  -  MagneGas2.  If the company captures just 0.1% of the $40 billion world industrial gas market by successfully selling MagneGas2 as acetylene and natural gas substitutes, it could realize $40.0 million in annual sales.  In the long-term a 10% net margin is reasonable for MagneGas based on the success of incumbents in the industrial gas market.  That implies estimated earnings per share for MagneGas near $0.11.  The large chemicals and industrial gas suppliers are trading at an average of 18.0 times earnings suggesting that MagneGas shares could be worth $1.98 per share under this scenario.

Now that would be financial plasma!

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.

October 12, 2014

In the Middle(sex) of the Organics-to-Power Sector

by Debra Fiakas CFA

A post in June featured Middlesex Water Company (MSEX: Nasdaq) as an unlikely player in the waste-to-energy game.  However, Middlesex has proven a capable project integrator, capitalizing on its collective knowledge of process engineering to launch a turnkey alternative energy service.  A successful waste-to-energy project in the Village of Ridgewood, New Jersey has placed Middlesex squarely in the middle of the organics-to-power sector.  Ridgewood taps its waste water for methane to power an electric generator.  The power is used at the Ridgewood Water Pollution Control Plant, making the plant self-sufficient for electricity.

The Ridgewood project could be just a one-off deal.  However, I think Middlesex could have some success in capturing more of the market.  Besides engineering savvy, Middlesex has a number of important municipal relationships.  A bit of networking, and Middlesex should be able to parlay its first success in Ridgewood into more situations with municipalities eager to find solutions to dwindling landfill space, ever-increasing solid and waste streams and the need to find new, lower-cost energy and fuel sources.  Municipalities have all the problems and few can manage the solutions on their own.

This provides one very good reason to put Middlesex in our list of waste-to-energy.  The second reason is the Middlesex dividend.  MSEX is currently providing a yield of 3.8%.  With a beta of 0.70, the stock can be expected to remain relatively stable as market conditions unfold.  Importantly, the stock is valued at 16.8 times 2015 earnings, making it just a bit more expensive that the rest of the industry that is priced at 15.0 times earnings.

Middlesex is also looking quite oversold at its current price level, at least according to a review of the technical indicator Commodity Channel Index for MSEX.  The stock fell through a key level of price support around mid-September 2014.  I view this as just a good chance to pick up some shares at good value.  It does not seem likely that the stock will continue to fall lower.  There is another level of support at the $19.25 price level, off which the stock bounced in early May this year.   Indeed, it appears the stock may be reversing course already.

There is not a great deal of upward momentum for small-capitalization companies in the current market conditions.  Contrarian investors with a buy and hold strategy and a taste for a strong dividend could find MSEX a compellingly priced stock with a ‘green’ revenue stream.

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. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.

October 07, 2014

Waste Management: Biogas with a Dividend

by Debra Fiakas CFA

The biogas industry has attracted a number of new entrants.  Blue Sphere (BLSP:  OTCQB) described in the recent post “Turning Potato Peels to Power” and RDX Technologies (RDX: TO, described here) are both newcomers to the biogas power generation.  Both companies show much promise and will likely grow dramatically over the next few years.  Shareholders are counting on the stock prices to follow.
Investors who are less interested in the big growth play and more interested in stability and current income are not left out.  There are larger, more established companies in the waste-to-energy market.  Covanta Holding (CVA: NYSE), which was discussed on the post “Big Player in Waste-to-Energy”, is one of them.  Its dividend yield is enticing and the stock has a very modest volatility as measured by beta of 0.10.  However, I concluded that Covanta is overbought.  The stock trades at a multiple of 35.3 times 2015 earnings, well above the average for the S&P 500 Index.
Fortunately, there are other choices for yield-hungry investors.  Like Covanta, Waste Management, Inc. (WM:  NYSE) got into the waste-to-energy business as a collector of wastes.  Based in Texas, the company operates a fleet of waste collection trucks and routes for municipal, commercial and residential customers.  While Waste Management still carts waste the landfills it owns, much of the waste is now sent through recycling and recovery processes to reclaim metals and extract energy from both organic materials.
Unlike Covanta that has been willing to own and operate, Waste Management has kept to what it knows best, waste collection and handling.  Instead Waste Management has used joint ventures to dip its toe into the waste-to-energy field. In March 2014, Waste Management announced a team-up with Ventech Engineers International, NRG Energy (NRG:  NYSE) and Velocys Plc (VLS:  LSE) to produce renewable fuel from methane gas coming from landfills.  Ventech and NRG will provide engineering and project management functions, while Velocys brings the gas-to-liquids technologies to the table.  Waste Management just has to keep the waste coming and make gas from its landfills available for processing.

Waste Management has converted about 17.6% of its sales to operating cash over the past three and a half years.  This sort of efficiency and profitability is critical for a capital-intensive operation.  Over half of the company’s $22.2 billion in assets are represented by plant, property and equipment.  Waste Management invests an average of $1.4 billion each year in new capital equipment and property improvements.  Free cash flow has averaged $1.0 billion per year over the last three years.  With such strong internal funds available, Waste Management is in a position to move aggressively in new businesses, including waste-to-energy projects.

WM offers a dividend yield of 3.2% at the current price level.  Although is not so impressive as the yield offered by Covanta even at its pumped up price, WM shares are trading at a more modest multiple of 19 times its 2015 projected earnings.  That is about on par with the average for the S&P 500 Index, making WM look quite affordable.  A review of historic trading patterns suggests the stock has developed considerable upward momentum, set off in late July by a triple top breakout seen in the 'point and figure' chart for WM.  The stock has been unfazed by the recent sell-off observed in the broader market in September and early October.  WM has continued its march higher without only minor pulls back from a new 52-week high set in mid September.  WM is also a fairly stable stock, with beta measure of 0.64.  Thus WM could give income-conscious investors an appealing dividend and a relatively stable and compellingly priced stock.  Oh, and you get some biogas with the bargain.

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.

October 04, 2014

Turning Potato Peels To Power

by Debra Fiakas CFA

The series on waste-to-energy continues with Blue Sphere, Inc. (BLSP:  OTC/QB), a relatively new entrant to the biogas power generation market.  Blue Sphere is focused on converting principally food waste to power using anaerobic digestion technology.  In May 2014, Blue Sphere started construction on a bio-digester and power generation facility near Charlotte, North Carolina, that will turn potato peelings and apple cores into 5.2 megawatts of power.  Duke Energy (DUK:  NYSE) has been lined up to buy the power when the plant goes operational sometime before the end of 2015.

Management expects to repeat its success at the North Carolina site in planning and integrating food waste-to-energy plants at other locations around the world.  A smaller 3.2 megawatt plant is planned in Johnston, Rhode Island where most of the supply chain relationships and financing arrangements are already in place.  Blue Sphere also recently entered into a memorandum of understanding for a new site in Boston, Massachusetts.  In its home country of Israel Blue Sphere has signed a preliminary agreement for a 5.0 MW biogas plant at a site provided by its partner in the project, government-owned Environmental Services Corporation.  The company’s development portfolio now holds 60 megawatts of potential power generation.

Blue Sphere has yet to generate revenue and profits.  The company’s management team led by CEO Shlomi Palas, has a plan to build the top-line even before its planned facilities in the U.S. become operational.  Palas and his team recently lined up a deal to acquire seven operational biogas power plants in Italy, generating one megawatt of power each.  All seven plants are profitable and are expected to begin contributing to Blue Sphere revenue and earnings by the beginning of 2015.  Another nine plants similar in size and profitability are the due diligence stage.

The waste-to-energy industry in the U.S. is not as mature as in Europe.  Development has been largely limited to the agriculture sector where small, privately-held system integrators address local and regional demand from dairy and other animal owners.  There seems to be room in the U.S. market for new players with alternative business models.  The USDA estimates that there is enough waste supply for 11,000 individual biogas plants in the U.S., while there are only 2,000 in operation.

It seems timely for Blue Sphere to penetrate the market with a food waste-to-energy model.  Several states have imposed restrictions on the largest food waste generators.  Massachusetts passed landmark regulations requiring generators of over one ton of food waste per week to find compost or biogas alternatives to landfills.  Generators must file certificates of their plans by October 2014 and then be fully compliant with the alternatives by 2016.  Connecticut and Vermont have already taken action to impose maximum landfill dumping rules for food waste generators.  With state and local policies directing food wastes away from landfills and towards recycling alternatives such as biogas generation, the current market conditions could not be better for Blue Sphere.

Crystal Equity Research recently published research on Blue Sphere in the Focus Report series.  The investment case in the report identifies Blue Sphere’s promising business case, but argues the stock does not appear to reflect growth opportunities or management’s progress in executing on the strategic plan.  Blue Sphere is still at a pre-revenue stage, thus is it not possible to value the company on a multiple of revenue or earnings.
One option is to consider the company’s power generation portfolio.  There are 7 megawatts that appear to be coming on-line in the next few months and another 53 megawatts in Blue Sphere’s development portfolio.  The closest comparable we have for a waste-to-energy power producer is Covanta.  It was noted in the article “Big Player in Waste-to-Energy” on September 19th that Covanta (CVA:  NYSE) has a mixed build-own-operate business model that is something like that of Blue Sphere.  Covanta is using municipal waste rather than the higher-energy food waste as feed stock, generating about 1,444 megawatts of power annually.  We could use Covanta’s ratio of Market Cap to Power Generation Capacity as a valuation method ($1.9 million per MW).  That rule would imply a future market capitalization for Blue Sphere of $13.3 million based on the company’s pending acquisition of 7 megawatts in Italy or $114.3 million on its entire development portfolio of 60 megawatts.

By comparison to Covanta, Blue Sphere is a much smaller company with a great deal to prove.  The Crystal Equity Research report suggests the stock is speculative and may only be appropriate for investors with a long-term investment horizon and high tolerance for risk and volatility.  Any valuation exercise should take those elements into consideration.  Still trading at $7.1 million market cap, Blue Sphere seems like a stock to watch carefully.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research does not have a rating or price target for BLSP.  The stock is discussed in a Focus Report published by Crystal Equity Research on September 24, 2014.

September 29, 2014

Casella Back In The Dumps, But Ready To Pick Up?

by Debra Fiakas CFA

Casella Plants Flag in Waste-to-Energy

The solid waste collection and disposal industry has been transformed by the building enthusiasm for waste recycling.  Founded in 1975, Casella Waste Systems (CWST:  Nasdaq) has been around to experience a lot of change and has been quick to get on the bandwagon.  The company is a self-described recycler and resource manager as well as a solid waste collector.

Granted the company is still heavily focused on its conventional solid waste business.  Casella management has outlined a four-point plan to grow the company and increase profits.  Top on their ‘to do’ list is to find incremental landfill capacity.  They are also trying to create new efficiencies at each of the company’s thirty-five solid waste collection operations.  That is just the usually blocking and tackling tactics of an incumbent solid waste handler.

Casella[1].jpgHowever, Casella has become much more than an ‘old school’ garbage hauler.  Some years back, Casella added metals recovery and plastics recycling to its menu of services, at the same time establishing a new revenue stream from the sale of recovered materials.    The company operates sixteen recycling facilities in its home region in the northeastern U.S.   Additionally, Casella operates nine landfills, four of which have been outfitted with methane gas recovery facilities.  The company actually produces 25 megawatts of power for local users.

Casella has also stepped into the organics-to-energy business.  Operating as Casella Organics, the company has established an anaerobic co-digester at a dairy farm in Massachusetts.  The plant co-digests dairy manure and food residuals from nearby sources.

A little over a year ago in April 2013, I wrote about Casella’s financial performance here.  Although operating cash flows have been at times ample, the company has had trouble delivering profits to its bottom line.  At the time I did not have a great deal of confidence in the stock to deliver returns in the near-term.  The stock actually took off a few months later, rising by as much as 50% after management provided guidance for sales growth in a range of 2.1% to 4.3% in the fiscal year ending April 2014.  Earnings before interest, taxes, depreciation and amortization (EBITDA) were guided in a range of $91.0 million to $95.0 million.

Alas, the stock lost all of its gains as the year progressed.  Casella was able to make good on its plans to grow revenue.  Sales in the fiscal year ending April 2014, were 9.3% higher than the previous year.  However, the company stubbed its collective Big Toe on profitability.  EBITDA was reported as $86.4 million, well below the guided range.  Since EBITDA is a critical factor in CWST valuation, disappointment increased with each passing quarter.

CWST is now trading near its 52-week low.  A review of historic trading patterns suggests the stock is oversold.  There has been a very strong bearish trend building in CWST since June, after the company reported fiscal year 2014 financial results.  It seems implausible that the stock could decline from its present level just under $4.00 per share.  Then again, shareholder equity has been eroded to a deficit and long-term debt levels have been rising.  Coupled with persistent net losses and shrinking profit margins, the weakened balance sheet does not provide a great deal of encouragement for investors who might be tempted take advantage of the cheap price for CWST.
That said, we note that the stock has been at the current price level four times in the last five years, rising each time by an average of 75%.  The company has a well established customer base and has been able to convert 11% of its sales dollar to operating cash.  If an investor has confidence in Casella’s regional stronghold in waste collection and hauling as well as the new flag the company has planted in the waste-to-energy business, then it is time to take a long position in CWST wait patiently.

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.

September 27, 2014

Covanta: The Big Player In Waste-to-Energy

by Debra Fiakas CFA

Covanta Holding Corp. (CVA:  NYSE) is among the largest waste-to-energy developers and producers in the U.S.  The company couples waste collection services for local government and industry with power generation for local municipal or commercial customers.  Covanta’s waste handling and ‘mass-burn’ process also allows for metal recovery and sales.  The company operates forty-six waste-to-energy facilities mostly in North America supported by eighteen waste transfer stations and four ash landfills. 

Covanta is a big player in the waste-to-energy industry, but what kind of yield does it's stock offer investors?

Covanta’s management team knows the pain of failure as well as the pride of success.  A decade ago Covanta was struggling to emerge from bankruptcy, but in the most recently reported twelve months the company reported a net profit of $47.0 million on $1.7 billion in total sales.  Granted Covanta is highly leveraged, carrying $2.3 billion in debt on its balance sheet that generates a 265.0 debt-to-equity ratio.  However, the debt-laden balance sheet is supported by strong cash flow generation.  Covanta turned 21.6% of sales in the last twelve month period into operating cash flow.  That helped bring cash on the balance sheet to $175 million at the end of June 2014.  Additionally, a new cost saving program initiated in June 2014, is expected to bring an incremental $30 million to the profit line.

One of the reasons Covanta has been able to crank up cash flow generation is by offering a mix of business models for its municipal partners.  Most of its projects follow a design-build-operate model wherein Covanta gets paid for waste collection and then shares in revenue from the sales of power.  Covanta is even gets guarantees of minimum waste streams by its municipal partner.  Alternatively, Covanta assumes ownership of the waste-to-energy plant and keeps all power revenue for itself.   

Besides the municipal waste-to-energy model Covanta has interests in seven wood-fired generation facilities in California and Maine.  The company also has partial interests in two hydroelectric power plants in Washington and is the owner/operator of a landfill gas to energy plant in Massachusetts.

The Company projects its portfolio of power plants could generate 6.5 megawatt hours of electricity in 2014.  The waste-to-energy group represents 88% of the total.

Earnings, Growth and Yield

As mentioned above the portfolio generates fairly strong cash flows that can be used reinvested or used for debt-pay down.  Covanta recently announced an increase in its dividend to $1.00 per year.  At the current stock price near $21.00 that dividend represents a yield of 4.8%.  Even with this payout to common stockholders, analysts watching the company are expecting about 13% earnings growth over the next five years.

Investors looking at Covanta’s cash flows and dividend yield might be impressed until they look at the stock’s price/earnings ratio of 35.8 times projected 2015 earnings.  The ‘PEG’ or price-earnings to growth ratio is 2.75 ($21.50/$0.60).  The stock looks just ‘flat out expensive.’ 

In my view, the fundamental analysis should not stop there.  Since the stock pays a good dividend, the current yield should be considered.  The ratio of price-earnings to growth-plus-yield or ‘PEGY’ is a bit more palatable at 2.01 [35.8/(13 + 4.8)].  Even this is not a full analysis of the investment picture for Covanta.  CVA shares represent a well-season security with deep trading volumes, strong institutional ownership and low price volatility.  So I argue that the PEGY ratio should be adjusted for risk as measured by beta, which for CVA is a relatively low 0.32.  On a risk adjusted basis the price-earnings to growth-plus-yield ratio or ‘PERGY’ is 0.64 (2.01 x 0.32)  -  well below the 1.00 maximum  for this popular benchmark.


This is no argument for investors to run to their computers and place buy orders for CVA.  A review of historic trading patterns in CVA suggests the stock is over-bought in the near-term.  The trend for CVA shares has been decidedly bullish since early May 2014, when the stock formed a particularly bullish trading pattern called a ‘double top breakout’ by stock chartists using point and figure analysis.  The chart suggests the stock has developed sufficient momentum to rise to the $39.00 price level.  That is a price that is not being bandied about by any of the fundamental analysts who watch CVA and have published price targets.  The highest published price target is $26.00 and the mean target is $24.00.

At the mean price target, fundamental analysts suggest there is 14% upside in the stock.  Technical analysis says there is room for 86% upside.  There is probably good reason to take note of both views.

Negative news could likely trigger a retreat in the stock price, but there is a noticeable level of support at the $20.50 price level.  Of course, an extreme set back could send the stock back to retrace levels in the price gap between $19.25 and $19.75, which was formed in early June 2014, after the company announced its cost saving plan and dividends increase.
The cost savings does not appear to have been registered analysts’ estimates for 2015 as the consensus estimate for next year has not budged for over four months.  If the cost saving program is at all successful, it  is more likely than not that Covanta could meet or beat expectations for earnings in the coming quarters.  Short interest in CVA is near 13.7 million shares or about 14% of the float.   Under current present trading volumes, it would take at least twelve days to liquidate short interests in CVA.  Strong fundamental news from Covanta could send traders with short positions looking for an exit point and, that could push the stock price higher.

With mixed signals coming from fundamental analysis and technical analysis, investors would be well advised to watch both earnings and the stock chart in taking any position in CVA.

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.

September 25, 2014

RDX: Waste Water-to-Energy

by Debra Fiakas CFA

Last week RDX Technologies, Inc. (RGDEF:  OTCQX or RDX: TSXV) announced an agreement to supply renewable diesel to the Tyson Farms’ Temperanceville Facility in Virginia.  The Energy Division of RDX sells three grades of methyl ester fuels that can be used in boilers and small generators.  RDX did not disclose the value or size of the Tyson Farms contract.  However, the contract apparently is for one year with a second year option.

RDX operates renewable fuel plants in Missouri and California.  Waste streams are aggregated at the two plants by truck and processed using technology developed by RDX CEO Dennis Danzik and his colleague Vincent Meli.  The company describes its process as ‘water mining’ wherein contaminants are separated from the water with electrochemical and photochemical techniques.  Waste polymers from the water have energy value and are converted to methyl ester fuels.

Selling fuel is not the only way RDX Technologies plans to generate revenue.  The company also wants to franchise its technology and sell water treatment equipment to aspiring fuel producers.  Called the RDX BlueDot system, the company recently announced a contract with Pontus Energy, LLC. to set up sixteen franchise locations in Ohio, Michigan and Kentucky. The contract was valued at $19.2 million

The company recently signed the Environmental Engineering and Science Department of Stanford University to use the RDX BlueDot system for further development of water treatment solutions.  RDX management expects the Stanford deployment to support subsequent franchising efforts in commercial markets where water treatment is an important or even more important than renewable fuel sources.

In the twelve months ending June 2014, RDX Technologies reported a loss of $10.0 million on sales of $36.7 million in sales.  That seems like a dangerous loss, but cash used to support operations was a significantly smaller amount $176,620.  The company has approximately $4.9 million on its balance sheet, which should support operations for a while longer if cash usage is kept under control.

The wisdom of a distributed power generation solution appears to be catching on and local communities are anxious to find smart ways to upgrade waste.  Of course, water is in short supply everywhere.  Technologies to clean up water are becoming even more critical.

RDX Technologies is still a developing company, but some of the technological risks appear to have been eliminated with the first commercial deployments.  There does appear to be a fair amount of execution risk left, but the stock is still worth watching for all investors interested in a stake in the waste-to-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.

June 22, 2014

Utility Expects Growth From Green Consulting

by Debra Fiakas CFA

Middlesex Water Company (MSEX: Nasdaq) has been providing the good people of New Jersey and Delaware with water services for a long time.  Its longevity in the marketplace is probably one of the reasons, Middlesex can claim a string of successive revenue and earnings increases.  The company achieved a net profit of $16.4 million on $115 million in total sales in the most recently reported twelve months.  More importantly, Middlesex turned 27.7% of those sales into operating cash flow, an achievement that helps support the company’s investment plans and dividend.
Like any other water company Middlesex makes a living delivering water to residential and commercial customers.  They also handle waste water.  The water business requires heavy investment in infrastructure  -  miles of pipes and valves.  Over the last three years Middlesex has invested an average of $21.7 million per year in capital expenditures.  Those water system investments have driven growth by 7.6% annually over the past five years.

Middlesex leadership thinks there is more than water in the company’s future growth.  A frugal operating culture has made it possible to leave an average of $6.0 million per year in free cash flow after covering capital spending.  The company is deploying that capital in industries where its water and flow process knowledge can make a difference  - namely biomass recycling and renewable energy production.

Teaming up with Natural Systems Utilities, a private consulting firm, Middlesex has carved out new niche business, advising waste water treatment plants on energy efficiency.  Its first project is in The Village of Ridgewood, New Jersey.  The waste water treatment plant will divert methane gas emissions into anaerobic digesters rather than burning it off into the atmosphere.  Using a biogas-drive generator, the plant will produce enough electricity to run the entire plant. A net grid agreement with the local electricity generator means the waste water treatment plant can maximize the value of its equipment investment.  Middlesex management sees its new service as a smart way to leverage its expertise without the capital costs usually associated with expansion of its water distribution business.

Apparently, the few analysts who follow Middlesex are not quite on board just yet with the new business plan.  The compound growth rate projected for the company over the next five years is only about 3%, suggesting those analysts who have published estimates for Middlesex see slowing growth in profits for the company.  Still in an industry beset by rising capital and operating costs, slow growth is an achievement.

MSEX shares have appreciated in recent trading sessions, but the stock still offers an attractive dividend yield of 3.7%.  I would wait for a pullback in price to accumulate shares.  That said, a review of recent trading patterns suggests a line of support may have developed in the $20.00 price level.  So it does not seem likely that a major price decline will occur unless macroeconomic or market conditions lead to a correction in equity prices across the board.

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. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.

February 03, 2014

The Muscle Car Of Energy Efficiency

Tom Konrad CFA
Disclosure: I am long TSX:PRI / PENGF.

The poster child of energy efficiency has long been changing a light bulb.  First, it was swapping out an incandescent for a compact fluorescent, now the swap is to an LED.  Changing a light bulb is a small step that anyone can take, and it’s so cost effective that it can pay for itself in months if the bulb is used frequently.

This is a good example of household energy efficiency measures: a small action requiring a limited investment that anyone can take that pays back quickly.

But efficiency does not have to be small scale and simple.  Efficiency can also be an industrial scale engineering project.  At any scale, however, it tends to be profitable, often very profitable.

CHP and Waste Heat Recovery 

Combined Heat and Power (CHP) is just such an industrial-scale energy efficiency opportunity.  CHP, also called cogeneration, involves capturing the waste heat from a power plant and delivering it to an industrial or other customer.  A related technology, Waste Heat Recovery, involves capturing waste heat from an industrial process and either using it to generate power, or for some other process.

combined heat and power-DOE.png

Image source: Energy.gov

CHP has been around for over a century.  I once toured the 40MW cogeneration plant at the Miller-Coors brewery in Golden, Colorado, which has been operating since 1976.  The waste heat from the power plant is used as process heat for the brewery, and some even goes to heat the nearby Colorado School of Mines campus.  That tour happily ended in the tasting room, which is where I developed a taste for Blue Moon and got the phrase “CHP is the muscle car of energy efficiency” stuck in my head.

CHP accounts for approximately 8% of current installed US generating capacity, and President Obama is seeking to increase that by half again by 2020.

Primary Energy Recycling

I expect Primary Energy Recycling (TSX:PRI, OTC:PENGF) to be part of the coming expansion of the US CHP fleet.  Primary Energy operates four recycled energy projects and one CHP project at ArcelorMittal (NYSE:MT) and US Steel facilities in Northern Indiana.   These facilities collectively avoid 1,850,000 tons (or 24 kg per share) of CO2 per year  according to EPA data.  Although the company’s customers are concentrated in the steel industry, the facilities they serve are among the most efficient and profitable facilities worldwide, giving Primary Energy significant protection from a steel industry downturn.

The company has 30 years of experience operating and improving these and other CHP facilities.    It previously had as many as 14 such plants, but many were sold when much of the company’s debt came due in 2009 in the midst of the financial crisis.  This was only one of several challenges the company has faced in recent years.  Others were the changes in Canadian tax law which effectively removed the tax benefits of the income trust tax structure, and the recontracting of all but one of their five facilities.  The contract for the final facility (Cokenergy) has been extended several times as the details of a long term contract are worked out.

In an interview, Primary Energy’s CEO John Prunkl explained to me that there is virtually no risk that this contract will not be extended.  It is part of a three-way agreement between ArcelorMittal, SunCoke, and Primary Energy.  The first two finalized their contract in October, and that part of the deal represents 90% of the economic impact for ArcelorMittal.  Primary Energy’s piece is the other 10%.  Analysts John McIlveen at Jacob Securities Inc. and Jeremy Mersereau at National Bank are also both confident the contract will be renewed.

The contract is expected to be similar to the existing contract, but is likely to contain a variable component which will allow Primary Energy to profitably invest to improve the energy efficiency of the facility, as they have at their other facilities.  In 2012, they completed an upgrade at their Portside facility which improved its efficiency from 70% to 90%.  Primary Energy has already begun the upgrades to Cokenergy to improve its efficiency.


The recontacting of the Cokenergy facility will also allow the company to borrow against its cash flows and invest in expanding its business without issuing new equity. They are currently evaluating a number of opportunities, but Mr. Prunkl emphasized to me that they would be emphasizing care in project selection rather than speed of execution.  The types of opportunities they are looking for are with industrial customers, located within the customers’ facilities.  They welcome complex projects where they can efficiently convert hard-to work with fuels into power and heat for their customers.  They expect to be able to achieve a risk-adjusted internal rate of return in excess of 12%.

The Stock

Primary Energy Recycling’s stock trades in Toronto with the ticker PRI, and over the counter in the US as PENGF.  It pays a US$0.05 quarterly dividend, which amounts to 4.5% at the recent price of C$5.00 / US$4.49.  The company has low debt, with only $41 million compared to a $223 million market cap, which is why it should be able to grow both its business and the dividend without issuing new equity.  I expect the stock price will increase somewhat when the Cokenergy contract is finalized, and more when definitive plans for expanding the business are announced.  While a finalized contract is likely soon, plans for business expansion will take longer.  Mr. Punkl did not want to make any promises regarding timing.  He said, “We’re going to work hard to avoid negative surprises on our investment plans after the Coke Energy deal.  We’re more concerned with making sure the investment will be the right one for us. ”

One downside is that the stock is very illiquid, with an average volume of only 6 thousand shares traded daily, and the average has been closer to two thousand since the start of the year.  Hence, it should only be bought with limit orders or very small market orders to avoid paying over the odds.  I hope a few readers already got a chance to buy after reading my Ten Clean Energy Stocks for 2014.


Primary Energy Recycling is an independent power producer using the greenest form of fuel imaginable: waste heat.  It has a rock solid balance sheet, a healthy dividend, and four long term contracts with solid industrial partners.  With its fifth and final contract soon to be finalized, Primary Energy is on the cusp of several years of growth.

CEO John Prunkl says, “We’re pretty excited, but it does require patience.”  I think investors should be (patiently) excited, too.

This article was first published on the author's Forbes.com blog, Green Stocks on January 23rd.

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.

January 05, 2014

The Pros Pick Two (Correction:Four) Offbeat Cleantech Stocks for 2014

Tom Konrad CFA

bigstock-green 2014.jpg
Green 2014 image via BigStock
Among the dozen stocks picked by my panel of professional green money managers for 2014, most followed three themes: Solar stocks, IT stocks, and income stocks.  Two didn’t, and they are included here.

This Cash-Rich Water Company Could Produce a Big Dividend

The first is a Japanese water utility, picked by Rafael Coven, the Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Coven likes Kurita Water Industries Ltd. (Japan:6370, OTC:KTWIF)  which “On restructuring it has a ton of cash” and generates a lot of cash despite zero growth. He calls Kurita “Terribly managed and a great candidate for takeover, breakup, dividend, or LBO,” although that “Doesn’t happen easily in Japan.”

Kurita is like Companhia de Saneamento Basico do Estado de Sao Paolo (NYSE:SBS; Disclosure: I am long SBS.) picked by Jan Schalkwijk CFA, a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments, in that it is a water utility, but the forward dividend yield is only 2%, so I don’t see it as an income stock like SBS.  

Investors betting on Kurita should be prepared to wait, as is Coven: he took pains to point out that he looks for stocks that should perform well over a longer time horizon than just one year.

Note: After this article was first published, Coven left a comment saying,

I may have overplayed my interest to Tom in Kurita as a speculative play.

While Kurita is a candidate ripe for breakup or a takeover (likely hostile), those are not attributes relevant to its inclusion in The Cleantech Index.  In fact, this week, we announced that Kurita is being dropped from The Index.

Cleantech Index companies must pass 18 quantitative and qualitative screens for inclusion including industry leadership, organic growth, management quality, intellectual property, etc.  In contrast, it's become increasingly apparent over the past few years, that Kurita's deteriorating performance has had less to do with Japan's economic malaise than with poor management, Kurita's entrenched "utility culture", lack of attention to shareholder interests, and failure to innovate.  As testament to this, Kurita has demonstrated only negligible success in the Asia's booming market for clean water.

Buying stocks on the expectation of a takeover/or pro-shareholder action/pressure is a questionable investment premise even in shareholder friendly countries.  However, I would caution investors even more from such a strategy in a country where activist shareholders and hostile takeovers are rare, and shareholder interests of lesser importance.  It may be a very long wait and the underlying business can deteriorate in the interim.

The "water" sector has been a sexy investment theme for a quite a while, but  few water companies ever consistently deliver returns above their cost of capital.  Even Siemens has thrown in the towel on this business.  There are very, very few good water companies, period.

I'd rather place my bet on a diverse portfolio of companies that are the leaders in their fields and demonstrate the ability to grow organically and generate sustained profit growth - especially if they have a global megatrend behind them that's likely to last for decades.

After I followed up on his seeming change of heart, it turns out we had miscommunicated about his picks.  He had initially given me four, and when I asked him to pare it down to three, he misunderstood, and gave me three different ones.  His "real" three picks are:

  1. MiX Telematics (NASD:MIXT)
  2. Control4 (CTRL) and
  3. Opus Group (Stockholm:OPUS, OTC:OPPXF)

This Waste Gasification Company’s Luck Has Changed

The other offbeat pick was from Schalkwijk. He likes Alter NRG Corp. (TSX:NRG, OTC:ANRGF), which he calls his “dark horse.”(The green hedge fund I co-manage with Schalkwijk is long Alter NRG.)

Jan says,

This Canadian waste-to-energy company had been a disappointment for years. Though its Westinghouse plasma gasification technology held great promise, large projects failed to materialize and the company lacked focus as it also tried to be a developer in the fragmented geothermal heating sector.

Recently, the company’s luck has changed: It won a big contract for a gasification plant in England from Air Products, a new CEO was brought in and Roman Abramovich (Russian billionaire and owner of Chelsea Football Club) made a strategic investment in the company. Subsequently, the company has won a 2nd big order from Air Products and various licensing deals.


One of my other panelists, Sam Healy, a portfolio manager at Lamassu Capital, chose not to make any picks at all this year because he feels most stocks are simply too expensive.  In expensive stock markets, it often makes sense to look for value in offbeat themes.  That, and the increased diversification, are good reasons for cleantech investors to give Alter NRG and Kurita their consideration.

This article was first published on the author's Forbes.com blog, Green Stocks on December 26th.

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.

October 18, 2013

China Recycling Energy: Profiting From Murky Air, But How Much?

by Debra Fiakas CFA

Shanghai at sunset as the sun fades into the smog.
Photo source: Suicup
China’s industrial pollution problems are mounting.  Global emissions of carbon dioxide (CO2) increased by 3% in 2011, reaching an all-time high of 34 billion tons.  China contributed a whopping 29% of that carbon dioxide  -  nearly twice that of the second worst polluter, the U.S., which spit out 5.4 million tons or 16% of the total CO2 emissions. 

Policy makers in China have been slow to move against industrial polluters out of concern for stalling economic growth the country badly needs to provide room and board for its 1.4 billion people.  Still there is a building waste reclamation and recycling sector.  One of the private sector leaders, China Recycling Energy Corp. is listed on Nasdaq under the symbol CREG after one of those reverse merger transactions that got so much attention a few years back.  The company designs, commissions and eventually sells waste processing and waste-to-energy systems to China’s industrial sector.

One of its newest partners is China Guangdong Nuclear Energy (CGN) located in the province of the same name.  The two have pledged to jointly construct waste-to-energy projects.  With financing resources getting tougher to come by in China, partnerships might be a smart way to keep the top-line growing.  In August 2013, China Recycling announced approval of a planned fund to invest in energy recovery and waste heat power generation projects.  Its partner in that effort is Hongyuan Huifu Venture Capital.
CREG shares might seem to be selling a bit dear at 18.2 times trailing earnings.  The company earned $0.14 per share on $29.0 million in total sales in the most recently reported twelve months.  Operating cash flow generation of $5.5 million or $0.11 is even less impressive.  China Recycling does not even have a clean balance sheet.  There is $63.2 million in debt outstanding  -  about equal to equity.
A premium valuation is all the more surprising given China’s reputation for cooked books and sham businesses.  I am still stinging over a fouled play on RINO International, an environmental clean-up operation that falsified contracts and revenue.  Earlier this year executives of that company  -  a husband and wife team  -  agreed to reimburse investors for funds $3.5 million taken from shareholders to pay for homes, cars and clothing.

As beguiling as environmental clean-up might be for the civic minded investor, before taking a position in China Recycling Energy investors need to look closely at corporate structure and audited financials.  Granted China Recycling is not a family operation like RINO International.  Its auditor, Goldman Kurland and Mohidin, is a member of the BDO Seidman Alliance and has bilingual auditors among its ranks.  Unfortunately, GKM partner Ahmed Mohidin was once employed by Kabani & Company, one of the U.S. auditing firms that has been suspected of passing over questionable financial records.

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.

September 29, 2012

Will Higher Heat Content in Trash Help Waste-to-Energy Stocks?

Tom Konrad CFA

The US Energy Information Administration (EIA) recently published an article describing an increase in the energy content of municipal solid waste (MSW).  The reason for this increase is an increase in the percentage of waste from “non-biogenic” sources (i.e. plastics) as compared to biogenic sources (paper, cardboard, wood, food and yard waste, etc.)  Biogenic waste has an average heat content of 11 MMBtu/ton, as compared to 23 MMBtu/ton for non-biogenic waste.

Source: U.S. Energy Information Administration, derived from U.S. Enivoronmental Protection Agency, Municipal Solid Waste data.

The EIA attributes the relative decrease in the amount of (biogenic) food containers and packaging (heat content 16.6 MMBtu/ton) and an increase in waste polypropylene (PP, 38 MMBtu/ton.)  PP is the relatively hard-to-recycle plastic #5, found in yogurt cups and other wide-necked containers, and has a much higher heat content that relatively easy-to-recycle plastics #1 and #2 (PETE at 20.5 MMBTu/ton and HDPE at 19.5 MMBtu.)

The higher heat content of MSW should make generating electricity from MSW more efficient, and give a slight boost to margins of waste-to-energy companies like  MSW electricity generators like Covanta (NYSE:CVA) and Algonquin Power and Utilities (OTC:AQUNF, TSX:AQN), which generates thermal energy from MSW in addition to a large renewable energy business.

However, if increasing energy content of waste is to make a difference in the stock prices of MSW-to-energy firms, it will have to be sustained over the long term.  I doubt the trend will continue for long.   First of all, total MSW volumes are flat in the US, and falling on a per-capita basis, even while recycling rates are rising (EIA data.)

I expect increased recycling to begin to reduce the energy content of the remaining waste as less-recycled, higher energy-content materials are increasingly recycled.  Currently, only 13.5% of plastic containers  in the waste stream are recovered, as opposed to 71% of paper and 33% of glass.   Further, high-energy PP is becoming increasingly easy to recycle; I was recently pleased to find that it and LDPE (plastic #4, also with a relatively heat content of 24.1 MMBtu) are now accepted at my local transfer station.

While waste-to-energy companies may be getting a small margin boost from higher MSW heat content today, investors should not count on any such boost being permanent.  That’s a large part of the reason why my preferred investments in MSW are integrated companies like Waste Management (NYSE:WM), which can profit from both increased recycling and waste-to-energy opportunities.

Disclosure: Long AQN, MW

This article was first published on the author's Forbes.com blog, Green Stocks on September 6th.

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.

September 11, 2012

Advanced biofuels pioneer Terrabon files for chapter 7 bankruptcy: One-off or trend?

Jim Lane

Closely-watched green gasoline producer collapses as Waste Management (WM) declines next financing round.
What does it mean for companies like Fulcrum Bioenergy, Enerkem, Agilyx, Agnion, Renmatix, Genomatica, and InEnTec? The Digest looks at the inside story.

Super-cali-what?In Texas, Terrabon filed for Chapter 7 bankruptcy protection; the company’s operations will cease and a trustee will be tasked with liquidating the company’s assets for the benefit of creditors.

The complete Chapter 7 announcement is here.

In a statement, Terrabon’s leadership said that company could not obtain additional corporate funding to finish developing and engineering its first commercial-scale plant. Suspension of operations resulted in lay-offs of approximately 60 full-time employees, effective with the bankruptcy filing.

The storyline is clear enough: Terrabon had a financing round planned for this year, which Waste Management was expected to lead. In August, Terrabon learned that Waste Management would not be participating in the round – part of what Terrabon was informed was a cutback in WM’s overall capital investment following a late July corporate shake-up.

What does Terrabon make?

Terrabon produces high-octane gasoline using its MixAlco technology. MixAlco is an acid fermentation process that converts biomass into organic salts. The resulting non-hazardous organic salts, or bio-crude, would be then shipped by truck, rail or pipeline to a Valero refinery or other centralized processing facility where it would be converted to a high-octane gasoline that can be blended directly into a refiner’s fuel pool, avoiding many of the blending and logistics challenges presented by ethanol.

As of last year, Terrabon had exceeded its goal of producing 70 gallons of renewable gasoline per ton of MSW using its patented acid fermentation technology.

And last fall, Terrabon announced that it has been awarded a $9.6 million, 18-month contract by Logos Technologies to design a more economical and renewable jet fuel production solution for the Defense Advanced Research Projects Agency.

More on that project here.

Rumors flying

The announcement capped off a month in which unconfirmed rumors concerning Terrabon’s struggles in its latest financing round increased in frequency and intensity. By Wednesday, the Digest wrote:

“But we expect that we have not seen the last round of rationalization by a major strategic – perhaps not even the last major announcement this month. Watch those companies that have had their strategics on board for three years, or more. It’s hard for strategics to make shifts in less than three years without looking unserious – without the data to make decisions – but three-year time windows are usually enough for portfolio rationalization to occur. Not to mention that effective corporate godfathers often move up or out within three years.”

The WM reorganization

wm logoIn the last week of July, Waste Management announced a decision to eliminate 700 positions – 2 percent of its overall workforce – and a flattening of its management structure as well as reductions in corporate support staff.

The plan was announced after WM profits fell to 45 cents per share for Q2 (down from 50 cents in Q2 2011) and well down from consensus analyst expectations, pegged at 53 cents. It was the fifth quarter in a row of falling margins at WM, and a second consecutive quarter of missing analyst expectations.

At the same time, WM maintained its shareholder dividend – putting presumed pressure on capital outlays such as represented by the investing activities of the Organic Growth Group, tasked with finding growth opportunities synergistic with the WM’s objective of maximizing value from waste, including converting them into biofuels, renewable chemicals and energy.

WM’s representative on the Terrabon board, WM Senior Vice President Carl Rush – chief of the company’s organic Growth Group, took early retirement in the corporate restructuring.

Other financing options at Terrabon

Terrabon quietly laid off 40 staff in late August in an attempt to reduce the cash burn and buy more time for refinancing. Other investors in Terrabon were sympathetic, but unable to fill the void on short notice. Valero, for example, had faced a similar situation at Qteros in the past year – while stepping up at Mascoma with increased investment aimed at helping that company proceed to complete its first commercial plant. Last summer, Valero announced that it OK’d the financing of the Diamond Green renewable diesel project off its balance sheet, and pulled out of the DOE loan guarantee program.

A flutter of hope

In the last week of August, hopes grew that Waste Management would be able to continue to support its complete set of planned investments, when WM and Renmatix announced a joint development agreement to explore the feasibility of converting post-consumer waste into affordable, sufficient-quality sugars for manufacturing biobased materials. At the time, it was reported that WM had joined global chemical giant BASF and Kleiner Perkins Caufield & Byers in Renmatix’s Series C raise, now totaling $75M. More on the WM, Renmatix deal is here.

In addition, WM continued to participate in Genomatica, joining the $41.5M Series D round that was announced August 3rd, and which included Alloy Ventures, Draper Fisher Jurvetson, Mohr Davidow Ventures, TPG Biotech, and VantagePoint Capital Partners – with WM as the chief strategic. But Terrabon was unable, ultimately, to secure another round of WM support.

Reaction at Waste Management

On Friday, Waste Management issued the following statement: “Waste Management has invested over several years in a diverse portfolio of conversion technology platforms to determine if they are scalable and economic. With the prospect of converting organic energy into biofuels still in various stages of development, not every initiative in our range of investments is certain to succeed. We will continue to nurture, evaluate and scale up the most viable conversion technologies that match our ongoing strategy of extracting more value from waste.”

The company also confirmed that former McKinsey partner Bill Caesar, who joined WM as chief strategy officer in 2010 and subsequently became president of Waste Recycling Services, had taken over responsibility for the Organic Growth Group, and the company said that OGG “definitely remains a part of our company post-restructure.”

Reaction at Terrabon

“It is with great disappointment we announce Terrabon has been unable to obtain additional financing and must suspend operations,” said Gary Luce, CEO of Terrabon. “This is a sad day for Terrabon’s employees, partners, suppliers and vendors who never wavered from their robust support of our company and the technology we deeply believe in. We want to thank them and convey how deeply we appreciate their steadfast loyalty during our journey to become an additional source of alternative energy for the United States.”

The company had been aiming for a 5 million gallon small commercial facility by 2013 based on 220 dry tons of feed per day. The copnay had intended to move to 500 ton and 1000 ton per day designs. At 1000 tons per day, they projected $1.00 per gallon operating costs and capital cost per annual gallon is between $6.00 and 8.00. Accounting for the BTU difference between ethanol and gasoline, on an ethanol-equivalent basis that equated to $0.67 per gallon operating cost and $4.00 – $5.33 per annual gallon capital cost.

More on the technology and data here.

Who else is in the WM portfolio?

Besides Terrabon and Renmatix – there are quite a few. Among them: Fulcrum Bioenergy, Enerkem, Agilyx, Agnion, Genomatica, and InEnTec. In the near term, Fulcrum Bioenergy and Enerkem are the closest to fuels commercialization (and the big capital calls).

In the case of Enerkem, they also have parallel investments from Valero and Waste Management (Enerkem Senior VP for Business Development, Tim Cesarek, was until last year the manageing director of the WM’s Organic Growth Group and served for more than a year on the Terrabon board.)

One-off or trend?

We see this as a one-off. WM had a wide range of investments, and though the timing was awful, portfolio rationalization is inevitable for strategics. Terrabon had not have a completed engineering package at commercial-scale – despite being founded in 1995 – and clearly was “a bridge too far” for WM.

Last week, we wrote: “Here’s the problem with big strategic partners for small, early-stage companies – and one of the reasons that, for many years, VC firms didn’t want strategics along for the ride in venture development: strategics change strategy, and small changes at big companies result in big changes for small companies. What is a ripple in the water to a giant is a tsunami to a fly.

“Often, strategy must shift as the result of weak earnings, weak economies, or large-scale acquisitions that come with collateral businesses that must be rationalized, cleaned up, or otherwise fitted under the corporate umbrella. Personnel changes at strategics can have colossal impact on small companies, too. Or just painful rounds of rationalizing investments, after the pleasant couple of years making them.”

The impact on other WM investments?

Too soon to tell. Certainly the company continues to be on a strategic path towards unlocking higher value from waste through advanced technologies that produce fuels and chemicals. With landfill volumes flat (and not helped by a sluggish economy, WM is determined to invest in new markets and higher-value product streams.

We continue to expect WM to take investments on a one-by-one basis – though the patience for long development timelines and the appetite for new technologies may have been reduced by increased capital constraints at WM in the nearer-term.

The bottom line

The company’s assets will be sold by the trustee. Absent a completed engineering package, it will be difficult to easily separate the technology from the laid-off team that had been built up to shepherd it towards commercialization. We’ll wait to see who picks up the Mix-Alco technology – both in terms of Terrabon’s improvements and the technology originally licensed out of Texas A&M. Also, we’ll wait to see the fate of the aforementioned Logos project to design a more economical and renewable jet fuel production solution for the Defense Advanced Research Projects Agency.

Disclosure: None.

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.

June 18, 2012

The X Factor in Covanta's Capital Budget

Debra Fiakas, CFA

Waste Heirarchy.png
The Waste Hierarchy, with
energy from waste highlighted

In the last post “Covanta on a Mission to Up-cycle Municipal Waste," I noted that even a group of experts advising Covanta Holding (CVA:  NYSE), has some concerns about the wisdom of channeling municipal waste through mass burn facilities like those of Covanta.  Recycling and reuse are considered even higher uses for municipal waste that result in net lower toxic emissions and net higher energy savings or energy generation.  For example, a report published by the European Union and entitled Waste Management Options and Climate Change notes that sorting municipal waste at the source and then recycling offers the lowest net greenhouse gases.  Only when compared to coal-fired power generation are mass-burn facilities on par with recycling in terms of greenhouse gas savings.

Let me first concede this point before moving on to look at Covanta’s investment in plant capacity.  However, I would also like to add the thought that if the waste is not getting recycled anyway, it makes sense to use the waste for electricity and steam generation, especially with the metals recovery that Covanta achieves.

Covanta has not published an average cost per facility, but a review of the company’s most recent construction projects suggests a wide range of costs.  For example, an energy-from-waste (EfW) project in Ontario, Canada referred to as the Durham-York project is expected to process 140,000 tons of waste per year.  The price tag for the project is estimated at about $250 million based on current exchange rates, implying a cost of $1,786 per ton on an annual basis.

Another project currently underway is the expansion of an EfW facility in Honolulu that will increase tonnage capacity by 900,000 tons per day.  The expansion is expected to require $302 million, implying a cost of $918 per ton.  Granted the Durham-York and Honolulu projects are not comparable since the Honolulu expansion capitalizes on infrastructure already in place.

The cost burden for an EfW facility does not necessarily fall exclusively on Covanta’s shoulders.  That is because the company has a variety of relationships with local communities, which leads in some cases to Covanta operating an EfW facility owned a local entity such as a municipality or special services agency.  When Covanta builds a facility that it will simply operate on behalf of a local entity, the construction project ends up in Covanta’s top-line as revenue.

For its own portfolio of owned-facilities Covanta invested $143 million in facility construction in 2011  -  a significant increase over the $101 million in 2010 and $27 million in 2009.  Additionally, Covanta invested $307 million in maintenance and enhancement projects over the last three years.  During the year-end 2011 earnings conference call management outlined an investment budget for 2012 of $50 million for growth projects and another $80 million to $90 million for maintenance capital spending. 

Property, plant and equipment on the books at the end of March 2012 totaled $2.4 billion.  Any investor in CVA has to wonder whether fixed assets values are secure given the view that mass burn for electricity is not the highest and best use for municipal waste.  Even with Covanta’s kicker of recovering metals, it seems like a significant increase in reuse and recycling would cut into both the volume and quality of the EfW feedstock stream Covanta depends upon.  Just how long will Covanta’s facilities be economically viable?  This might be the X factor in Covanta’s capital budget. 
Covanta has been relying upon fixed fee and put-or-pay provisions in their operating contracts to protect the company from volume and cost risks.  The company recently lost a contract to operate a facility in Hartford, Connecticut because the Hartford community wanted a cost-plus-fee contract arrangement.  Covanta appears to have simply let the relationship go to a competitor to avoid the risks a cost-plus-fee contract might entail  -  letting go at the same time to a 100% contract renewal track record.  The put-or-pay provisions may be as important in the coming years as more pressure is put upon communities to promote “reduction, reuse and recycling.”  

This article is part three of a three part series.  Here are part one and part two

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.  CVA is included in Crystal Equity Research’s Beach Boys Index in the Waste-to-Energy Group.

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

June 13, 2012

Covanta on a Mission to Up-cycle Municipal Waste

Debra Fiakas, CFA

Waste Heirarchy.png
The Waste Hierarchy, with
energy from waste highlighted

Covanta Energy (CVA:  NYSE) is a champion of renewable energy.  So much so that Covanta commissioned an elaborate sustainability report in 2010, detailing the company’s three-year track record in elevating municipal waste from the landfill to a higher order of use.  Compliant with standards set by the Global Reporting Initiative, the report is full of choice tidbits from Covanta’s municipal waste experience  -  at least through the year 2009.

Let’s look at 2009, the last year covered in Covanta’s sustainability report.  Covanta says it takes about an hour to process one ton of municipal waste  -  the paper, cans, plastic grocery sacks, left over Chinese takeout and soda pop cans we toss in the garbage each day.   The waste goes through a high heat process  -  it is not incineration  -  leaving an ash heap about one-tenth of the volume of the original waste.  In 2009, Covanta processed 17 million tons of waste leaving behind 1.7 million tons of ash. 

What is important about Covanta waste process is not so much the dramatic reduction in what goes into landfills.  The heat is used to drive steam turbines that are part of a power plant.  In 2009, Covanta’s operations generated 8.8 million megawatt hours of electricity.  The process also allows for the recovery of metals  -  400,000 tons in 2009.

The “what goes in and what comes out” presentation is straightforward enough.  Covanta’s claims related to greenhouse gas emission reduction are a bit more complicated.  Covanta’s sustainability report claims a reduction of 17.0 million tons of greenhouse gases in 2009, measured through an estimation of how much methane might have been generated by the waste going directly to the landfill, the net gain in electricity and the metals recovered.

I will give Covanta the benefit of the doubt on the greenhouse gas reduction.  Of greater concern in my view is how much energy and resources are needed to sustain Covanta’s operations.  The company does not avoid the question, but does not really answer the question either.  Covanta’s plants do require some energy input during start-up, such as natural gas, fuel oil or propane.  However, once the high heat process begins, it is self-sustaining.  The plants only go off-line when needed for repairs or periodic maintenance.  That is encouraging, but we are left guessing just how encouraging, as Covanta report does not disclose its consumption of any of these fossil fuels.

It is also important to note that the basic Covanta plant design requires about 0.7 acres for each megawatt hour of electricity that the plant is intended to produce.  This is considerably less than is required for wind towers or solar farms.

Of course, whenever there is high heat, there is often also a significant water requirement.  In 2009, Covanta used 560,000 gallons of water to process the 17 million tons of waste.  It seems like a great deal of water.  Fortunately the Covanta process does not require potable water.  The 2009, water requirement was fulfilled with 400,000 gallons of grey water and another 160,000 gallons of landfill leachate water.

Covanta’s 2010 sustainability report is an impressive tome, but appears to be a one-time effort.  The company has not published on update, leaving us wondering how sustainable Covanta’s operations have been in the last two and a half years.  I do not think we should assume that the track record in 2010 and 2011 is exactly the same as 2009, but it is probably close.  Covanta’s 2011 annual report claims 19.0 million tons of waste were processed and 10.0 million megawatt hours of electricity were generated.

One of the most interesting admissions in Covanta’s sustainability report is that the company’s own advisory group has questioned the wisdom of diverting waste to energy generation.  There is apparently concern that Covanta’s minimum volume contracts with municipalities discourage recycling, which could be an even higher use for the waste than electricity generation.

The company’s experience suggests that one ton of waste can be used to generate 0.55 megawatt hours of electricity and 0.024 tons of recovered metals.  However, if towns and cities promoted recycling then even more metals and other materials could be recovered.  More importantly, communities should do more to encourage reuse and reduction in waste in the first place.

Covanta claims that you and me along with our fellow Americans generate about 390 million tons of waste annually.  The U.S. Environmental Protection Agency estimated municipal waste was 250 million tons in 2010, significantly lower than Covanta numbers.  According to Covanta about 69% of the waste is going to landfills.  Another 24% is recycled.  Covanta claims it has only got a lock on about 7% of municipal waste in the U.S. and wants to capture.  The EPA thinks recycling rates are higher  -  around 34%.  No matter which set of numbers you believe, it is clear we are an improvident bunch.  Those advisors’ objections notwithstanding, it seems Covanta is doing us a big favor by elevating our garbage out of the landfill and onto bigger and better things.

This article is part II of a three part series.  Part I is here.

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.  CVA is included in Crystal Equity Research’s Beach Boys Index in the Waste-to-Energy Group.

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

June 12, 2012

Covanta Turns Waste into Cash

Debra Fiakas, CFA

Waste Heirarchy.png
The Waste Hierarchy, with
energy from waste highlighted

The self-styled “energy-from-waste” company Covanta Holding (CVA:  NYSE) turns municipal waste into electricity and recycled metals.  The operations also turned 21.9% of its revenue into cash in 2011.  We note that the conversation ratio has declined over the last three years from 28.7% in 2009 and 27.2% in 2010, but we are still impressed with any cash conversion rate over 20%.

The company operates forty-one mass-burn facilities around the U.S. that burn all manner of unsorted municipal waste to heat water into steam.  The steam in turn drives electricity-producing turbines.  Covanta sells the steam or the electricity through various off-take agreements.  Ferrous and non-ferrous metals are also recovered in the process and resold in the commodity markets.  These two revenue sources accounted for 24% and 10% of total sales, respectively. 

The real money makers for Covanta are the tipping and service fees it charges municipalities to handle the solid waste and dispose of the ash that is left over at the end of Covanta’s burn process.  Besides the mass-burn facilities Covanta owns and operates or just operates municipal-owned facilities  -  twenty-two of them  -  such as ash landfills, biomass projects, hydroelectric facilities and landfill gas operations.  Tipping and services fees from all these facilities totaled $1.1 billion in 2011 or 66% of total revenue.

Not a bad business  -  turning waste into cash.  Granted, Covanta is debt-heavy with $2.3 billion in debt on the balance sheet at the end of March 2012, including the short-term portion and including project debt.  This means Covanta has a debt-to-equity ratio of 2.20.  However, cash earnings are 6.1 times interest burden, suggesting Covanta’s operations generate enough profits and cash flow to handle even that level of debt.

Covanta has delivered some of the largesse to shareholders through dividends of $223 million and $42 million in 2010 and 2011, respectively, and the repurchase of shares valued at $230 million in 2011.  Not a bad haul for shareholders  -  turning stock into cash. 

To get in on the Covanta action requires a payment equal to 24.0 times expected earnings of $0.59 per share in 2012.  This might be an acceptable price tag if Covanta was expected to deliver that much growth in the future.  Alas the same analysts who came up with the expected earnings estimate think average growth is only going to be 17% in the next five years.

Covanta is included in the Waste-to-Energy Group in our Beach Boys Index.  CVA shares have corrected twice in the last two years, as much in response to broader equity market trends as to Covanta’s fundamental situation.  In my view, it is a stock worth watching for an entry point.

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.  CVA is included in Crystal Equity Research’s Beach Boys Index in the Waste-to-Energy Group.

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

September 29, 2011

Fulcrum Bioenergy’s $115M IPO: The 10-Minute Version

Jim Lane

The first zero-cost feedstock biofuels company comes to the public markets with its IPO.

Like to see how this “Back the the Futuresque” technology unlocks value by converting household garbage into transportation fuel?

Here’s our 10-minute version of the IPO from Fulcrum Bioenergy.

In California, Fulcrum Bioenergy has filed an S-1 registration statement for a proposed $115 million initial public offering. The number of shares to be offered and the price range for the offering have not yet been determined. The company proposes to list under the symbol FLCM. UBS Investment Bank is the underwriter for the offering.

The company is currently ranked #45 in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

Fulcrum becomes the 12th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, PetroAlgae (PALG.OB), Myriant, Ceres, Genomatica, Mascoma and Elevance have also filed S-1 registrations for proposed IPOs.. Three in the past week, in fact.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Fulcrum model, opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Company Overview

Fulcrum produces advanced biofuel from garbage. Its business model combines a proprietary process and zero-cost municipal solid waste, or MSW, feedstock to provide them with what they term “a significant competitive advantage over companies using alternative feedstocks such as corn, sugarcane and other sources of biomass in the production of renewable fuel”. According to the filing, they have entered into long-term, zero-cost contracts for enough MSW located throughout the United States to produce more than 700 million gallons of ethanol per year; the core element of their technology, they confirm, has been demonstrated at full scale.

They intend to use a substantial portion of the IPO proceeds of this offering to fund the construction of its first commercial-scale ethanol production facility, the Sierra BioFuels Plant. At this facility, they expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits.

For a company that believes in waste, they sure don’t believe in large overhead. It’s a poster child for lean management in the development of advanced bioenergy. Employee headcount is just 17, at IPO time, with just 2 in research and development.

Development costs to date: net losses of $12.4 million, $16.5 million, and $18.0 million for 2008, 2009 and 2010, respectively and $13.8 million for the six months ended June 30, 2011. Total: $63.8 million.

The Technology

From the S-1: “In collaboration with a leading global engineering, consulting and construction company, we conducted an extensive review of more than 100 technologies and processes for producing large volumes of advanced biofuel and concluded that thermochemical technologies offered the most commercially viable solution. Based on this review, we developed a two-step process that consists of gasification followed by alcohol synthesis to produce ethanol from MSW. For the gasification step, we worked with InEnTec LLC, or InEnTec, to combine two gasification technologies into a single energy-efficient process to produce syngas from MSW. For the second step, we worked with Saskatchewan Research Council, or SRC, and Nipawin Biomass Ethanol New Generation Co-operative Ltd., or Nipawin, to integrate their thermochemical catalyst into our proprietary alcohol synthesis process to convert syngas to ethanol.”

The Market

The market-limiting factor for this biofuels process is not the overall demand for transport fuel, or ethanol, but the availability of MSW as a feedstock and the availability of sufficient tipping fees to ensure that arrival of zero-cost or negative-cost feedstock at the manufacturing facility gate.

From the S-1: “According to the EPA, annual MSW generation in the United States has trended upwards over the past several decades, increasing from 88 million tons in 1960 to 243 million tons in 2009. On average, each person in the United States generates approximately one ton of MSW per year. More than 85% of the MSW generated in 2009 was comprised of carbon- and hydrogen-based organic materials with latent energy content.

Waste collectors are charged fees for landfill waste disposal, which are referred to as tipping fees. According to the Waste Business Journal, the national average for tipping fees increased from $28.52 per ton in 1991 to $45.62 per ton in 2011, with considerably higher tipping fees in more densely populated regions.”

Based on the Fulcrum yields of 50 gallons per ton of MSW, the addressable US market is 12.15 billion gallons of ethanol.

The Strategy

Commence production at Sierra. They plan to commence construction of the first commercial-scale ethanol production facility by the end of 2011, with ethanol production expected to begin in the second half of 2013, at a total capacity of 10 million gallons per year.

Expand production capacity. They will use the the modular design of the technology to construct new, larger facilities quickly and efficiently, with future production capacity at 30- and 60-million gallons per year at future facilities. Such larger facilities would also lower both the capital cost per gallon and the fixed cost component of per gallon production costs (to as low as $0.90 per gallon), enhancing the economics.

Execute fixed-price offtake and hedging contracts. For each facility, we intend to enter into physical and/or financial fixed-price arrangements to lock in sufficient economics to cover a substantial portion of our fixed costs, including debt service.

Secure additional MSW contracts. Longer term, they intend to expand our business by entering into additional MSW feedstock agreements to increase the amount of resources we have available to supply our commercial facilities.

Explore new market opportunities. They may license the technology to third parties and/or partner with large strategic players, such as major oil and chemical companies, outside of the base model to build, own, and operate facilities within the United States.

The Commercialization Plan

Coming online in 2013 and located in the Tahoe-Reno Industrial Center approximately 20 miles east of Reno, Nevada, the cost of constructing the 10 million gallon Sierra project is estimated at $180 million, which will be financed through existing equity capital and proceeds from this IPO.

The State of Nevada currently has a demand for ethanol of more than 50 million gallons per year. Today, there are no ethanol producers in the state of Nevada, nor to our knowledge are there any slated for development other than Sierra.  The State of California currently has a demand for more than 950 million gallons of ethanol per year and imports 80% of its total ethanol supply .

Future locations will have capacities of 30 or 60 million gallons, and unsubsidized cash operating costs of less than $0.90 per gallon.

They have identified more than 20 potential site locations across the United States for future development, located in the 19 states in which they have contractually secured zero-cost MSW. They believe opportunities may exist to co-locate our facilities at sites with significant infrastructure in place, such as refineries, which could lower our per-gallon capital costs.

Fulcrum as it sees itself:  11 Competitive Strengths

Zero cost feedstock. We have executed feedstock contracts with some of the largest waste service companies in the United States that will supply us with sufficient feedstock, at zero cost, to produce more than 700 million gallons of advanced biofuel annually for up to 20 years. Our use of MSW at zero cost removes the largest, and most volatile, component of traditional renewable fuels production cost from our cost structure. We believe this provides us with a significant cost advantage over competitors paying for feedstock or utilizing purpose-grown feedstocks.

Transportation advantage. Significant volumes of MSW are generated near metropolitan areas, providing us with a transportation advantage compared to feedstocks harvested or grown in rural areas that must ultimately transport either the feedstock or the fuel to metropolitan areas.

Reliable supply. The United States generates more than 243 million tons of MSW annually, the majority of which is rich in organic carbon, providing sufficient feedstock for our process to produce approximately 12 billion gallons of biofuel annually.

Established infrastructure. By using MSW, we benefit from existing infrastructure for collection, hauling and handling. No new logistical networks would be required to transport the feedstock to our facilities.

No competing use. We produce advanced biofuel from a true waste product that has no competing use, is not sought after by food producers and has no impact on food prices.

Clear path to commercialization. Our first commercial-scale ethanol production facility is expected to begin production in the second half of 2013. We expect to construct additional commercial-scale production facilities across the United States that will be supplied with MSW under our existing contractual arrangements with Waste Connections, Inc. Our modular plant design not only significantly reduces scale-up risk, but will also allow us to construct new facilities and deploy our capital efficiently to capture a meaningful share of the ethanol market in the United States.

Proprietary process not dependent on yield improvement. Our process integrates a catalyst that converts syngas into ethanol, and we have demonstrated the success of this process at full scale at our demonstration facility. We believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which we believe is sufficient for us to operate profitably in the absence of economic subsidies.

Business model built for long-term and sustainable profitability. We do not rely on government subsidies to make our product commercially viable. While we benefit from policies such as RFS2 and the LCFS, and will access incentives available for the production of our advanced biofuel, we expect our product to be sold on a cost-competitive basis with existing transportation fuels without any reliance on subsidies.

Flexible production process. We have designed our proprietary alcohol synthesis process to give us the flexibility to produce alcohols other than ethanol and take advantage of opportunities in other renewable fuels and chemical markets.

Benefits for our customers. Zero-cost feedstock; stable cost structure.   Access to domestically-produced advanced biofuel.  Large-scale development program.

Benefits for our MSW suppliers. A cheaper source of waste diversion than traditional landfill disposal. Extend landfill life at existing capacity levels.  Avoidance of methane gas emissions.

The Risks, Translated from SEC-speak

In SEC speak: We are a development stage company with a limited operating history, and we have not yet generated any revenue. We currently expect to begin constructing our first commercial ethanol production facility, the Sierra BioFuels Plant, or Sierra, by the end of 2011, and to begin production in the second half of 2013.

In English: We ain’t sold nuttin’, honey. Cause we ain’t built it yet.

In SEC speak: To date, the components of our process have been demonstrated or used separately, but we have not previously demonstrated the processes on a fully-integrated basis at a single location or on a commercial scale.

In English: “Salagadoola mechicka boola bibbidi-bobbidi-boo. Put ‘em together and what have you got? Bibbidi-bobbidi-boo.”

In SEC speak: We are currently in the process of negotiating a term sheet with the U.S. Department of Energy, or DOE, for a loan guarantee to fund a portion of the construction costs associated with Sierra. As a part of the loan guarantee process, the DOE and its independent consultants conduct due diligence on projects which includes a rigorous investigation and analysis of the technical, financial, contractual, market and legal strengths and weaknesses of each project.

In English: S-O-L-Y-N-D-R-A.

In SEC speak: In order to produce sufficient yields of ethanol to make our facilities economically viable, we will require large volumes of MSW feedstock. Though we have entered into long-term MSW feedstock supply agreements with waste companies to provide enough feedstock to produce more than 700 million gallons of ethanol annually at zero cost, deliveries by such companies may be disrupted due to weather, transportation or labor issues or other reasons outside of our control.

In English: “Keep America Beautiful” – throw lots and lots of litter in the general direction of Lake Tahoe, please.

In SEC speak: We will also apply to the State of California to have our ethanol certified under California’s Low Carbon Fuel Standard, or LCFS, which would make our ethanol eligible for the carbon intensity reduction credits that will be available under this program for reducing the carbon intensity of California’s transportation fuels.

In English: Not that California might actually pull the rug out from underneath any biofuels venture. Nah, never happen.

In SEC speak: As of June 30, 2011, our executive officers, directors and beneficial holders of 5% or more of our outstanding stock owned almost all of our outstanding voting stock. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

In English: Ah, Skywalker, you will not be a full member of the Jedi Council at this time.

Financing to date

In 2007, James A. C. McDermott, the Managing Partner of USRG Management Company had contributed or made commitments to contribute $1.0 million to the LLC, for  6,741,573 shares of Series A convertible preferred stock.

In August 2007 and February 2008, they sold an aggregate of 14,000,000 shares of our Series B convertible preferred stock at $1.00 per share for an aggregate purchase price of $14.0 million.

In October 2008, they issued two Senior Secured Convertible Notes,  to USRG Holdco III and  Rustic Canyon Ventures III, with an initial maximum principal amount of $5.0 million for a maximum aggregate principal amount of $10.0 million, which accrued interest at the rate of 8% per year

In March 2010, they issued two new Senior Secured Convertible Notes to the same parties – the 2010 USRG Note and the 2010 Rustic Canyon Note, with an initial aggregate principal amount of $4.0 million.

In June 2010, the 2008 USRG Note and the 2008 Rustic Canyon Note were converted into 13,450,762 shares of Series B-2 preferred stock, in exchange for the conversion of $26.9 million in principal amounts and accrued interest owed on the notes.

In September 2011, the 2010 USRG Note and the 2010 Rustic Canyon Note were converted into 12,924,605 shares of Series C-1 preferred stock at $2.67 per share,  in exchange for the conversion of $32.5 million aggregate principal amount of our senior secured convertible notes and $2.0 million of accrued interest.

Also in September 2011, they sold, or expect to sell prior to completion of this offering, an aggregate of 29,216,738 shares of our Series C-1 convertible preferred stock at $2.67 per share for an aggregate purchase price of $78.0 million, including the conversion of the 2010 USRG Note and the 2010 Rustic Canyon Note.

Fair Valuation by the board of directors

November 1, 2007: $0.24

April 19, 2010: $0.41

June 27, 2011: $1.53

The bottom line

This is the first of the waste-to-biofuels companies to come to the public markets, which elevates the opportunity and risk for the investor in the absence of a benchmark IPO offering.

The company has spent $63.8M to date bringing itself to the cusp of commercialization, which is relatively cheap as advanced biofuels goes. Several companies have filed IPOs after racking up more than $100M in development costs to the point of constructing their first commercial facility.

Like most others (but not all) in this IPO wave, Fulcrum comes to the market with no revenues, and as a financing event rather than a liquidity event for existing shareholders. Having had most of 2011to raise capital, they have (after completing their 2011 pre-IPO financing) $49M in the bank as of June 30th.

Attractive aspects of this filing: zero-cost, locked in feedstock. Assuming we believe the cost estimates from the demonstration-level work that has proceeded to date, there’s not much that can go materially wrong in terms of the proposed production cost of $1.30 per gallon for ethanol.

Unattractive aspects: aside from the absence of a full-scale demonstration, there’s a high capital cost for this process (at the Sierra facility) of $18 per gallon of capacity – that’s more than nine times the cost of building out corn ethanol at scale – though corn ethanol producers (buying on the spot market) are looking at feds rock costs in the $2.50 per gallon range. Even assuming zero-debt and a 20-year life for the facility, the amortized capital cost of this facility will raise the overall fixed production cost to $2.20 per gallon on an unsubsidized basis, which leaves little room for profit at current spot ethanol prices of $2.50 per gallon and exposed at the CBOT current October 2012 ethanol futures price of $2.12 per gallon.

On the other hand, with its 75 percent GHG reduction, Fulcrum will not be competing head-to-head against, say, corn ethanol, but rather be competing within the cellulosic biofuels pool, which in the RFS is restricted to technologies that produce a 60 percent or higher GHG savings. There, the prices (given tight supply for some time to come) are expected to be higher.

Pools of risk: Aside from the aforementioned risks associated with the Sierra project, we have a sketchy, but not contracted out, pathway to future facilities.

The complete S-1 registration statement is here.

Jim Lane is the Editor and Publisher of Biofuels Digest.

May 05, 2011

WSTE Not, Want Not

Tom Konrad CFA

A truly sustainable economy would produce no waste: everything would be recycled or reused for some productive purpose.  We're a long way from that ideal today, but the rising cost of commodities makes recovering used material through recycling increasingly economic. Further, the rising cost of energy makes converting municipal and industrial waste into advanced biofuels or combusting it to produce electricity an increasingly economic option.

Attempting to guess which advanced biofuel technology will be successful strikes me as a fool's errand.  Why not instead invest in the owners of the feedstock?  While I don't know which technology will achieve commercial success, I do know that a technology which can turn trash into fuel will make the trash more valuable, benefiting the companies that haul the trash today.

Trash is already being turned into energy.  Companies like Waste Management (NYSE: WM) have been installing turbines to convert captured methane gas from landfills into electricity for years.  Companies like Covanta (NYSE:CVA), which operates more than 40 Energy-from-Waste facilities throughout the United States.  The commodities boom have makes metals and electronics recyclers like Sims Metal Management (NYSE:SMS) more profitable as raw materials become more expensive.


If you're interested in investing in this trend, you now have two choices.  Global X Funds recently launched the Global X Waste Management ETF (NYSE:WSTE), which joins the Van Eck's Market Vectors® Environmental Services ETF (NYSE: EVX), which was launched in October 2006.  WSTE has a slightly more diversified portfolio, with 28 holdings, compared to EVX's 22 holdings, although their top holdings are practically identical.  EVX has a lower expense ratio (after a contractual cap which expires on May 1, so it may rise), compared to WSTE's 0.65% expense ratio.  Neither has great liquidity, with EVX's trading $150,000 worth of shares on an average day over the last 3 months, while WSTE traded about the same amount on a recent day this week.  Prospective buyers should probably use limit orders.

If you're interested in trash as an investment, which should you choose?  For short term trades, I'd look to the one which settles out with the most liquidity after a few months.  For longer term holding you might do better by picking a few of the stocks most likely to benefit from rising commodity and energy prices: Each firm's top holding is medical waste company Stericycle (NASD: SRCL) which seems to have less potential to profit from these trends than Waste Management, Veolia (NYSE:VE), Covanta, Darling International (NYSE:DAR), and Sims, which appear just a little farther down the lists.

Building a sustainable energy future sometimes requires is to get our hands dirty. To do anything else would be a waste.

This article was first published on Tom Konrad's Green Stocks blog at Forbes.com

DISCLOSURE: No Positions.

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.

September 16, 2009

Another Look at the Algonquin Power Income Fund

The Algonquin Power Income Fund (AGQNF.PK) has been one of my star performers in an excellent year.  Is it still a good investment at these prices?

 Since I recommended the Algonquin Power Income Fund (AGQNF.PK/APF-UN.TO) in January as a renewable energy income stock for 2009, the company is up 69%, in addition to the C$0.02 monthly dividend, worth approximately another 8% through August on the US$1.82 purchase price, making it the second-best performing of my ten picks (after Cree, Inc (CREE).)  However, since the major basis for my recommendation at the time was the stock's extremely cheap valuation and high yield, I thought it was worth revisiting, on the occasion of the company's Q2 update [pdf]


Major events in the first half  were Algonquin's planned acquisition of a 50% stake in California Pacific Electric Company (Calpeco), the former California assets of NV Energy (NVE), and the fund's plan to convert into a corporation and acquire some tax loss assets through a deal with Hydrogenics Corporation (HYGS).


The Calpeco deal gives Algonquin some exposure to electricity transmission and distribution (in which their partner Elmira has management expertise) in addition to their current exposure to renewable energy generation.  Since I like the potential opportunities in electricity transmission, I think this was a step in a good direction for Algonquin.  Furthermore, about half of Algonquin's stake in Calpeco will be financed with an equity investment in Algonquin from Elmira at C$3.25 per unit.  Since this is only slightly below the current price, and well above the price at which I recommended the stock, the transaction will be non-dilutive for both me and my readers, and a reasonable exchange for more recent investors.


In July, a reader worried that the deal with Hydrogenics was a bad idea because Hydrogenics is a fuel cell company, an alternative energy sector neither of us is enthusiastic about.  In fact, this is a short term deal, and shareholders need not be concerned with ending up owning a fuel cell company when they thought they owned a renewable energy power producer.  Despite the legal complexity, this deal is not a tie-up with Hydrogenics, but rather a way for Algonquin to acquire corporate status, and Hydrogenics' tax loss assets at the same time.  Because Algonquin is profitable, and Hydrogenics is not, these tax loss assets are valuable to Algonquin, but not Hydrogenics, allowing both companies to benefit. Algonquin will gain the benefit of Hydrogenics previous losses in exchange for a cash payment, which will allow the cash-poor, unprofitable company to continue operations. The transaction has been approved by Algonquin unitholders and Hydrogenics shareholders, and awaits regulatory approvals.


The Trust's first half revenue was down compared to 2008, which management attributes to lower natural gas prices.  Gas prices affect the trust's revenues through lower contract prices for the heat from their thermal generation units.  I find this to be a good sign, since I expect that low current natural gas prices will rebound because they do not provide sufficient incentive for natural gas companies to drill and replace the gas supply from depleting wells. Although I expect that low natural gas prices will depress revenues in the short term, Algonquin's operating cash flow and earnings should continue to be easily sufficient to fund distributions to unit holders with plenty left over to fund Algonquin's growth plans.

At current prices of C$3.32 for APF-UN.TO and US$3.07 for AGQNF.PK, with a yield of 7.2%, I consider Algonquin to be reasonably valued, and continue to hold my positions.  However, because I currently expect a market decline, I would only suggest buying Algonquin today if you also hedge your position against general market moves.

DISCLOSURE: Tom Konrad and/or his clients have long positions in AGQNF.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

July 09, 2009

$3 Billion For Cleantech & Alt Energy

Charles Morand

The DOE made public earlier today the amount of money that will awarded to clean power projects in lieu of the usual tax breaks: $3 billion.

This will allow project proponents to receive a direct cash grant now instead of a Production Tax Credit or an Investment Tax Credit later on. The guidance document notes the following:

"Section 1603 of the Act’s tax title, the American Recovery and Reinvestment Tax Act, appropriates funds for payments to persons who place in service specified energy property during 2009 or 2010 or after 2010 if construction began on the property during 2009 or 2010 and the property is placed in service by a certain date known as the credit termination date (described more fully below in the Property and Payment Eligibility section). Treasury will make Section 1603 payments to qualified applicants in an amount generally equal to 10% or 30% of the basis of the property, depending on the type of property."
This is the cherry on a sundae of cash handouts announced over the past few months for the alt energy and cleantech industries. Solar and wind installations - which account for the lion's share of alt energy investments - have yet to come back to life in any significant way. It is hoped by both government and industry people that this new measure will provide sufficient impetus in the near term to carry the sector through the remainder of the recession.

To be continued... 

July 01, 2009

Clean Energy Stocks Shopping List: Landfill Gas and Geothermal

Stocks seem expensive now, but that may not last.  Here are two Landfill Gas stocks and three Geothermal stocks I'm hoping to buy if the market falters.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  So far I've brought you:

This article takes a look at two of the most economical clean electricity generation technologies, landfill gas and geothermal.

Kilowatts from Trash

As I discussed in my recent article on Advanced Biofuels, I expect that advanced biofuels are likely to have to compete with electricity generation for feedstock, and electricity generation is likely to take a large part of the pie.  More importantly, the most likely companies to gain are the ones that control the feedstock.  I like waste management companies because they already have contracts and experience in dealing with local governments.  As those governments adopt broader recycling measures, waste-to-energy, and even mandatory composting, waste management companies that have the skills to process waste effectively will be able to provide these additional services.  This should increase their revenues and profits from the same amount of trash, and may lead to new opportunities to sell byproducts such as recycled materials and electricity.

#1 Waste Management Inc. (WMI). Waste Management not only collects trash, but also does recycling and waste-to-energy services.  Over the last few years, they have been aggressively expanding their methane gas recovery facilities at existing landfills, and often works under contract with governmental entities.  To me, this portfolio of skills seems ideal for exploiting future opportunities to find value in the stuff that we throw away.

WMI has a rock solid balance sheet, with almost $1 billion in cash, strong cash flow, and low debt-to-equity and current ratios.  A modest forward P/E of 13, and a dividend yield of over 4% makes this company attractive to cautious investors, even at current prices.  This is fortunate, since the low Beta means that the stock is unlikely to decline much in response to a general market decline.

#2 Veolia Environnement (VE) Also provides world-wide waste management services, but is a much broader company with an expertise in government contracting.  In addition to solid waste, they offer a large range of environmental management services, from water and wastewater treatment (there are also opportunities to generate electricity from methane produced at wastewater treatment plants.) They're also involved in several of my other favorite sectors: energy efficiency through their energy management services, and clean transportation through their transit and rail services.

The company is much more highly leveraged than Waste Management, however, and had a very thin profit margin in 2008.  This makes the company much more riskier than Waste Management, with a Beta of 1.8 compared to Waste Management's 0.5.  However, a market downturn may provide the opportunity to buy this company at a dramatically reduced valuation.

Geothermal Stocks

Hot rocks are a hot industry these days, and geothermal electricity has a lot going for it.  First, electric utilities are very comfortable with it, since geothermal plants are baseload and are very reliable, and costing only about 6 to 11 cents per kWh.  Geothermal also has strong support on Capitol Hill, gaining explicit mention and ($350 million) in the Recovery Act.  

#3 Ormat (ORA), a vertically integrated geothermal company works with almost all the players in the industry.  Many of the exploration companies, such as US GeoThermal (HTM), contract with Ormat to build their power plants.  They also do their own exploration, construction, and operation of geothermal plants world wide.

Although I consider the company a core geothermal holding, I recently sold much of my position because the recent rally carried the company to very high valuations, with a forward P/E and dividend yield of 25 and 0.4%.  Given that the stock price has almost doubled since early March, I expect to be able to get back in at much better prices.

#4 Raser Technologies (RZ) is a sharp contrast to Ormat, being the industry upstart with a disruptive business model.  Raser is leveraging cheap, off-the-shelf technology from United Technologies Corp. (UTX) in order to greatly decrease exploration costs and time.  This modularity means that Raser can start building a power plant before they have fully explored a geothermal resource.  If they later find that the resource can support a larger plant, they can simply add units.  Their first plant in Thermo Utah was completed in less than a year, on a known low temperature resource that had been previously been considered too cool to generate power, meaning that exploration was not necessary.

The company recently completed a $25.5 million offering at a 22.5% discount to the stock price at the time.  The stock promptly sold off more than 30%.  With the company rapidly burning through cash, the raise was necessary in order to continue their rapid expansion plans.  I would not have touched the company before the raise (although I listed it as one of Ten Clean Energy Gambles for 2009.  With Raser down almost 30% since then, and some fundraising out of the way for the short term, the odds of the gamble are looking a lot better.  

#5 Nevada Geothermal Power (NGPLF.PK) is a more conventional exploration and development company with a few high quality projects.  This company now expects their first producing project at Blue Mountain to be fully operational in October 2009.  The shift from an exploration company to a power producer should bring a whole new class of investors to the stock, although the recent doubling of the stock price has quite possibly discounted most of these gains.  But with thinly traded stocks such as NGP, any change in investor sentiment could easily drop the price significantly and provide new buying opportunities in the meantime.

DISCLOSURE: Tom Konrad and/or his clients own WMI, VE, ORA, HTM, RZ, UTX, and NGLPF.  

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

January 13, 2009

Focus On Clean Power Income Trusts

Last week, Tom brought you a piece on the Algonquin Power Income Fund (AGQNF.PK), in which he opined that shift in investor attention away from capital gains toward yield might eventually provide a catalyst for the prices of yield-focused securities such as income trusts to rise. So-called utility trusts, or income trusts where the underlying corporation is engaged in utility activities such as power generation, are a common feature of the Canadian income trust sector (the mother of all income trust sectors). A sub-set of utility trusts is the clean power utility trust, where the power generation assets consist of technologies such as wind, small hydro, biomass and waste-to-energy (WtE). Though new tax rules have effectively made it impossible for new income trusts to be brought to market (barring certain exceptions such as REITs), existing clean power utility trusts (existing as of Oct. 31, 2006) get to operate under the old tax regime until 2011.

The clean power utility trust model is similar to the clean power Independent Power Producer (IPP, see definition) model, whereby firms are pure-play clean power generators (i.e. they own only generation assets) that sell their electricity to utilities, with the exception that the tax treatment awarded to income trusts allows them to pay higher yields by avoiding double taxation.

While changes in legislation mean that this investment vehicle is dying a slow death, Tom was correct to point out that in times where the prospects for strong capital gains are uncertain and interest rates low, income trusts provide a good way for investors to access high yields. What's more, clean power utility trusts, this most unique of Canadian investment sub-sector, allow investors (including US investors) to play North American clean power in a way that does not entail a risky bet on a technology play but is rather much more akin to a utility investment.

Clean Power Utility Trusts             

Name Ticker Related Corp. Entity (Ticker) Yield (%)* Assets
Algonquin Power Income Fund AGQNF.PK N/A 9.16 Hydro, Cogen, WtE, Wind, Water/Wastewater
Boralex Power Income Fund BLXJF.PK Boralex (BRLXF.PK) 19.77 Biomass (wood residue), Hydro, Nat Gas Cogen
Macquarie Power & Infrastructure Income Fund MCQPF.PK N/A 18.88 Nat Gas Cogen, Wind, Biomass (wood residue), Hydro, Long-term Care Home
Innergex Power Income Fund INRGF.PK Innergex Renewable Energy (INGXF.PK) 10.81 Hydro, Wind
Northland Power Income Fund NPIFF.PK Northland Power (not public) 9.44 Nat Gas Cogen, Wind
Great Lakes Hydro Income Fund GLHIF.PK N/A 8.01 Hydro

*As at close on Friday Jan. 9, 2008

One of the major risks facing income trusts is distribution cuts, something that generally happens when the fundamentals of the underlying business are severely diminished or distributions were set too high to begin with (in order to attract investors). As can be noted from the table, the yields on some of these trusts (i.e. Boralex Power Income Fund and Macquarie Power & Infrastructure Income Fund) appear to indicate that investors are anticipating distribution cuts and are demanding a risk premium. Yet preliminary screens on both funds don't uncover much evidence that distribution cuts are in the cards (caveat: these were very preliminary screens).  

While growth will be challenging as long as credit conditions remain tight (individual projects typically use over 50% debt), the underlying business model and existing assets of these funds remain largely immune from a slowing economy - they are utilities with a clean twist. Barring another major round of indiscriminate selling in equity markets, investments in one or more of the clean power utility trusts is a good way of generating returns in the form of cash yields (something that's worth a lot more than the promise of future capital gains in this economic environment) from a comparatively low-risk sector.

Some of the things to look for as red flags in assessing these trusts are: liquidity position (cash on hand; quick ratio) and ability to borrow for emergency purposes (undrawn line of credit); leverage level (debt-to-capital ratio) and the need to roll over debt in the next 12 months; any signs that operating conditions have deteriorated (e.g. for wood biomass, indications that pulp/saw mill closures related to the bad economy are decreasing fuel supply).

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 24, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #3 Waste Management, Inc. (WMI)

In large part, the transition to clean energy will involve using our resources much more efficiently than we do now.  One large potential feedstock for biofuels (and arguably the only one which is truly sustainable) is our trash.  As the world economy grows, and the available stock of natural resources diminishes, society will have no choice but to use what we have more efficiently and throw less of it away.

In addition to the now familiar recycling of Aluminum, glass, cardboard, paper, and plastic, yard and construction waste will find its way to cellulosic ethanol plants, and used cooking oil will be transformed into biodiesel.  Formerly problematic hazardous waste such as electronics will be reused, and what can't be reused will be mined for increasingly valuable (and toxic) elements they contain.  

One company likely to be at the center of many of these trends is Waste Management, Inc. (NYSE: WMI.)  As the United States' largest trash hauler and recycler, they are in the enviable position of being paid to collect potentially valuable material. Growth in recycling need not be a drain on earnings, since in many cases, recycling programs simply allow them to enlist customers to help them segregate recyclables from other waste, or to offer higher value-added services such as single-stream recycling.  It's clear that management understands these trends, having adopted "Think Green" as the company slogan, and has put new emphasis on recycling and Waste-to-Energy divisions.  Even if the initial motivation was the urge to greenwash, the opportunity for profit has not been lost.

As the largest operator of landfills in the US, Waste Management is also in the enviable position of managing large, renewable sources of natural gas.  Landfill gas, unlike many other forms of renewable energy can provide baseload electricity, or, with the addition of gas storage, dispatchable power.  In addition to these advantages, the cost to produce electricity from landfill gas is price competitive with conventional electricity generation.  Waste Management has been aggressively collecting landfill gas at more landfills around the country, and has even developed technology to accelerate decomposition and methane production in bioreactor landfills.

Waste Management has seen decreasing trash volumes over the last two years, in large part due to the slowing economy, especially the construction sector.  Despite this, they have been able to use their pricing power and cost slimming to increase their profits per share over that same period.  The prices of recycled commodities, like all commodities have also been robust over the same period.  If waste volumes cease to decline, and the prices of recycled commodities continue to rise (which I expect, although they are predicting flat pricing for recycled commodities), they should see excellent profit improvement over the next few years.

Finally, WMI management feels that they have already seen most of the decline that they expect from a slowing economy, and they have been able to weather that decline well by aggressively cutting costs.  Any rise in volumes due to an uptick in economic activity should be multiplied in increased profits.   For the longer term, existing landfills may be the source of much more revenue than just landfill gas.  The first step in using resources more efficiently will be recycling rather than sending them to landfills.  Further in the future, we may see actual mining of old landfills, recovering the trash of yesteryear for the products of tomorrow. 

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in WMI.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 04, 2007

Global Resource Corporation and Mobilestream Oil

This is the text of an email I received from a reader of my article on Global Resource Corporation (GBRC.PK).  He has reason to suspect that things are much worse than just the weak governance issues I uncovered.

I have been posting on Investors Hub as a result of family members being stung for a substantial purchase of Mobilestream Oil (MSRM.pk), now being converted to Global Resource stock. A poster gave me the link to your interesting article about Global and your problems contact Jeff Andrews.

I am trying to contact Mr Andrews at present, in an attempt to get some explanations about how and why my family members were pressured into buying Mobilestream Oil stock by a firm calling itself Aston Rowe of Dubai. 

My family members had no prior intention of buying anything, but fell for it. I am now trying to retrieve the situation and have emailed Jeff Andrews for confirmation that the substantial amounts of Mobilestream stock are validly issued and what the role of this agency "Aston Rowe" was. Aston Rowe have now faded from the scene. 

I am concerned that the whole deal was a total boiler room fraud. If not, how did Mobilestream come to use such a suspect agency as Aston Rowe, who show up on the internet as a suspected boiler room. Mobilestream's agent Olde Monmouth have the details of my family members' purchase and have been writing to them re the proposed conversion to Global stock. 

I am perplexed as to the relationship between Mobilestream/Global and this shady operator calling itself Aston Rowe.  I would really like some explanations from them but haven't much hope of success. My relations were taken for $81,000 and my argument is that this type of deal is voidable for misrepresentation and fraud....see my Investors Hub post if you are interested.

Fog On the Tyne 

Sheffield, UK

He sent me his real name but I have replaced it with his investor's hub pseudonym to protect his privacy.  If you have had a similar experience, please help other investors with the comments on this entry, or by joining the discussion on Investors Hub.

DISCLOSURE: Tom Konrad and/or his clients do not currently have positions (long or short) in GBRC or MSRM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

July 20, 2007

Global Resource Corporation: Needed Technology; Unanswered Questions About Management

On July 3, The Energy Blog told us about a process of turning old tires back into valuable oil and gasses.  Given the problems of Peak Oil and plastic waste which can mimic almost anything in the environment, I was intrigued, and I had the feeling that other watchers of the alternative energy space would be, too.  After a quick review to make sure that the technology was based on sound science (I believe it is, although that is no guarantee that it can be commercialized), and a search for information about their governance policies and a board list (which I did not find), I noted that they have all their SEC filings available on their website, which I took to be a good sign.  I bought small amounts of the Global Resource Corporation (GBRC.pk) stock for several of my more speculative clients (at prices between $2.20 and $2.35), based on the intuition that I would not be the only one to see the potential for this technology, and that others would write about it.  I expected that the favorable press would drive up the price of the stock.   

Phone Tag

I then began more in-depth research.  If the company turned out to have a quality management team, who I felt would be able to realize the true potential of the technology, I fully intended to take substantial positions in all my managed accounts for which the company would be appropriate.  I began reading through their SEC filings, and sent an email to their general inquiry line, asking for management bios and any governance documents they had adopted.

Two days later, I heard back from Jeff Andrews, Global Resource's CFO, but not with the list of the Board of Directors and bios I had requested, but rather with a request to call him "next week."  "Next week" passed with a game of phone tag, and eventually I set up (by email) a phone appointment with him the following Tuesday, the 17th.

Cause for Concern

In the meantime, I had had a chance to review the SEC filings (the most interesting reading is their most recent 10K), and gleaned the following information:

  1. Global Resource was the product of a reverse merger between blank-check company Advance Medical Technologies Inc. (formerly Email Mortgage.com Inc.) and Carbon Recovery Corporation, a company which inventor and current CEO Frank Pringle had created in the hope of commercializing the technology he had invented while at Mobilstream Oil.  
  2. The only members of the board of directors of GBRC were Frank Pringle, the CEO; Jeff Andrews, the CFO, and Frederick A. Clark.  Since Mr. Clark is "representing the company in Pennsylvania for matters with respect to the proposed tire disposal facility," there are no independent board members.
  3. The list of related party transactions is quite long, with a complex web of interrelationships between GBRC, Molbilstream Oil, and Careful Sell / PSO Enterprises, all of which seem to be controlled at least in part by Mr. Pringle.
  4. The company had been negotiating an acquisition of some unknown company, but the deal had fallen through, and GBRC had terminated a private offering (at some expense to themselves) with which they had been planning to fund the acquisition.  This deal could possibly have been the reason I had been having so much difficulty speaking with Mr. Andrews.
  5. GBRC had retained the services of QualityStocks.net, a somewhat spammy internet promoter and purveyor of stock newsletters.  While this may be a smart move for a company hoping to pump up its stock price in anticipation of a secondary offering, it is not something I would expect of a company planning to preserve its long term reputation.

Missed Appointments

On Tuesday, I called Mr. Andrews at the appointed time, and was put directly through to him by Global Resource's front desk without having to identify myself.  He claimed to be pressed for time, and asked if we could reschedule for the next day.  Due to my calendar constraints, we settled on Thursday.

His continued unavailability, along with the unaddressed concerns raised by my research made me decide to sell GBRC in all accounts.  Fortunately, my prediction of a small flurry of interest in the blogosphere had been accurate, and I was able to sell at prices near $5.  I reasoned that if Mr. Andrews were able to adequately address my concerns, I would be able to buy the stock at lower prices when interest inevitably shifted to the next hot technology.  If he could not, there was no reason to hold the stock now that it had already received the expected media attention.

On Thursday, I again called at the appointed time, and was again passed through to Mr. Andrews without difficulty.  He asked if I could call back in two hours when he "had more time."  I asked, "How much time do you have now?" to which he replied, "Two seconds, I'm with my accountants, and trying to get them out of here."  The line then went dead, as did any remaining interest I had in the company.  I decided to write this article without speaking to management.

Further Concerns

Later, when I had time to read through Global Resource's most recent 10K more thoroughly, I found several other worrysome items.

  1. The company dismissed its accountants in November 2006.  The auditors had questioned the company's ability to continue as a going concern.
  2. In their Sarbanes-Oxley compliance statement, Mr. Pringle and Mr. Andrews had raised concerns over the lack of sufficient written
    policies and procedures to insure the correct application of accounting and financial reporting requirements, as well as a deficiency in internal controls relating to a lack of segregation of duties.  While they have hired an accounting firm to help them remedy these weaknesses, Mr. Andrews had not provided me with any information in this regard in response to my initial request asking for governance documents.
  3. The company does not currently have a code of ethics.
  4. The company is the subject of a lawsuit arising from its former incarnation as Advanced Healthcare Technologies, alleging the company "fraudulently induced the plaintiffs to convert certain debt to equity in the Company, which equity has subsequently become valueless."  While this lawsuit does not concern the actions of current management, it raises concerns about the level of diligence of current management in their planning for the reverse merger.  There are also obviously concerns that the lawsuit might be successful, although management "does not believe that any judgment, or any settlement of the litigation, will have a material effect on the profit or loss of the Company."

Perhaps, if I had spoken with Mr. Andrews at length, he could have allayed my concerns.  However, I am also concerned about his lack of availability in itself.  

On Friday, I tried to short the stock at $5.10, but was unable to do so.  It has not been above $5 long enough to be marginable.

UPDATE: I recently received an email from a UK citizen who feels his family has been the victim of a boiler-room scheme involving Mobilestream Oil and Global Resource Corp.

DISCLOSURE: Tom Konrad and/or his clients do not currently have positions in GBRC.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

September 07, 2004

UTC Power Introduces the PureCycle 200 Power System: Recycles Waste Heat to Produce Electricity without Additional Emissions

United Technologies Corp (UTX) states that their UTC Power division has announced the arrival of the PureCycle(TM) 200 power system, a unique heat-to-electricity technology that recycles waste heat as free fuel to generate electricity.

The PureCycle(TM) 200 system operates without emissions and is completely pollution-free, employing a closed-cycle process using technology developed by UTC's Carrier division. In principle, the PureCycle(TM) 200 works like a reverse air-conditioner. Energy is absorbed into the system by a liquid refrigerant that vaporizes when heated. The hot vapor turns a turbine, which drives a generator to create electricity. Later, the hot vapor circulates through a fan-vented cooling chamber, returns to its liquid form, and begins the cycle again. [ more ]

Image that if you had a Fuel Cell system for your house, which generates heat to produce energy. That heat can be used to provide whole house heating and also water heating. Now it can also be used to generate additional electricity.

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