April 04, 2014

Ocean Power Technologies Riding The Waves

by Debra Fiakas CFA

Shares of Ocean Power Technologies (OPTT:  Nasdaq) have traded off over the past two weeks, after setting a new 52-week high in early March 2013.  Investors had bid the stock up in the weeks before the fiscal third quarter earnings announcement, but those gains almost have been erased.  The new negative trend has put OPTT on our list of small-cap energy stocks sinking into oversold territory. 
PowerBuoy[1].jpg
Is the sell-off a chance to pick up shares of this ocean power developer at a bargain?  A better question might be what was in that earnings report that spooked investors into shedding the stock.

Ocean Power is trying to develop ocean power technologies.  The company’s PowerBuoy system is an ocean-going rig that is configured to capture and convert wave energy into electricity.  Ocean Power has managed to set up several demonstration projects around the world, supported by government grants and development contracts.    Ocean Power also has a contract with Mitsui Engineering for a deployment near the coast of Japan.


Still Ocean Power has to come up with matching funds.  In January 2014. the company raised $6.3 million through the sale of common stock.  The company needs the cash to support operations, which used $10.7 million in cash over the twelve months ending January 2014.  There is now $17.4 million in cash on the balance sheet, it appears the company has enough financial muscle to last about a year and a half.

Perhaps investors were looking for some evidence that Ocean Power would be able to reduce its cash burn.  However, the quarter results revealed management is still grappling with the nitty gritty of getting its projects off the ground and into the ocean.  Permitting and financing matters have delayed its projects in Oregon and Spain.  Consequently, reported revenue in the third fiscal quarter was significantly lower than expectations.  There is no hope for reduced cash burn when management reveals one delay after another.

Thus, after hitting a new high price, it should not be a surprise that OPTT shares weakened.  It might be a bit premature to begin buying at the current price near $3.50.  A review of historic trading patterns suggests there is a line of price support at near the $3.40 price level.  Should the stock test and fall through this level, it is quite possible the stock could fall considerably further, perhaps even to the $2.50 price level.

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.

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Oil and Gas




April 03, 2014

Strong Returns Continue for Alternative Energy Mutual Funds and ETFs

By Harris Roen

Alternative Energy Mutual Fund Returns

Alternative energy mutual funds have posted extremely strong returns across the board. Gains have shown a wide breadth, with all MFs up for the last 12-month and 3-month periods. In the past year, all funds are up double digits.

A new fund has been added to our tracking system, Calvert Green Bond A (CGAFX). This fund started trading in November 2013, and is the first green open end bond fund designed for retail investors. CGAFX focuses at least 80% of its assets on “…opportunities related to climate change and other environmental issues.”

Credit ratings for holdings in CGAFX are solid overall. Almost 70% are invested in either cash, U.S. Treasuries, or A rated bonds or better…

MF_20140321[1].jpg

Alternative Energy ETF Returns


ETF_20140321There are a wide range in returns for ETFs this month. On average the group is looking very strong, as returns and other measures have been improving.

The two purest solar funds, Guggenheim Solar (TAN) and Market Vectors Solar Energy ETF (KWT), show the strongest returns. Both have more than doubled in the past in the past year, and both are up by about a third in the past three months.

The two mining funds in this group, Global X Lithium ETF (LIT) and Market Vectors Rare Earth/Str Metals (REMX), are the poorest performers. REMX is down 23% for the year, and LIT is basically flat…

ETF_20140321[1].jpg

DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

April 02, 2014

LDK Melts Down, Solar Default Signs Grow

Doug Young 

One of China’s 2 major meltdowns in the solar panel sector has taken a big step forward with word that trading in shares of LDK Solar (NYSE: LDK) has been suspended and the de-listing process formally begun as the company liquidates. Meantime, word of a missed interest payment by a building materials maker is sending the latest signal that China will let more companies in ailing sectors default on their debt rather than pay off their creditors. That’s an important signal for the solar sector, which relies heavily on such debt to finance its operations and where many smaller players are in danger of similar defaults.

Let’s start this solar summary with LDK, which together with former solar superstar Suntech (OTC: STPFQ) is in the process of liquidating amid a broader sector clean-up. But whereas Suntech has been liquidating under the supervision of a bankruptcy judge, LDK has chosen the stranger route of winding down without such protection. Perhaps that’s not too surprising since China is quite new at bankruptcy reorganizations, though it has created a strange process where LDK has been quietly talking with its creditors and selling off assets in a process that’s not too transparent.

The company gave an update last week on talks with its bondholders and an interim financing agreement (company announcement), and has just provided a further update on the imminent de-listing of its stock. (company announcement) According to the announcement, trading in shares of LDK has been formally suspended — something that should have happened long ago. LDK also said the New York Stock Exchange has begun a process of de-listing the company’s shares.

Suntech’s shares were de-listed from the New York Stock Exchange months ago and now trade over the counter, following the company’s bankruptcy declaration about a year ago. Such a de-listing didn’t happen for LDK because it never formally declared bankruptcy, which is why the stock exchange itself is finally taking an action that should have happened months ago.

According to its latest announcements, LDK is still talking with bond owners about terms for paying off its debt, offering 20 cents for every $1 of investment. The process still looks like it may take a while to complete, but I expect LDK to disappear as an independent company by the end of this year.

Meantime, let’s look at the other major news that sends the latest signal that more solar companies could soon default on their debt payments. That would accelerate a process that saw 1 company default on a bond interest payment last month and another move in a similar direction. The latest reports say that closely held building materials maker Xuzhou Zhongsen failed to make a 180 million yuan ($29 million) payment on some high-yield bonds that was due on March 28. (English article)

That particular story is related to the real estate sector, which is gearing up for its own much-needed correction following a housing bubble that has seen property prices soar to ridiculous levels over the last decade. But the more important message is that Beijing will let ailing companies default on their debt, and make investors more responsible for losses when they buy risky bonds. That would mark a sharp shift from the past, when government entities would almost always come to the rescue of state-run companies that were in danger of defaulting on their debt.

Last month saw a major milestone when mid-sized solar panel maker Chaori Solar missed a bond interest payment, becoming the first such corporate bond default in modern Chinese history. Not long after, trading in shares of Baoding Tianwei (Shanghai: 600550) was suspended as it too flirted with a debt default. (prevoious post) This latest default by Xuzhou Zhongsen shows that the flow of defaults is likely to pick up in the months ahead, hitting many mid-sized and smaller solar players and hurting the ability of larger players to raise new funds.

Bottom line: LDK’s liquidation is likely to be complete by year-end, while the latest market signals indicate more smaller solar companies will default on their debt in the months ahead.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

April 01, 2014

Ten Clean Energy Stocks For 2014: Patience Rewarded

Tom Konrad CFA

For both the stock market and the weather, March was more lion than lamb.  My broad market benchmark fell 2.2% to end up 1.5% for the quarter.  Volatile clean energy stocks were down 4%, to end the quarter up 15.7%.  My annual Ten Clean Energy Stocks model portfolio is designed to avoid much of the sector's notorious volatility, and fell only 0.6%, ending the quarter with a 3.9% total return. 

In dollar terms, the first six (income oriented) picks returned an average of 3% in March and 9% for the quarter, while the last four (growth oriented) picks fell 8% in March and 4% for the quarter.  The two speculative picks gained 21% in March and 17% for the quarter.  Local currency returns were slightly higher due to the weak Canadian dollar so far this year.

Two of the companies in the portfolio, Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF) and Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF), announced long-awaited contracts, as did speculative pick Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF) which is not included in the model portfolio due to its speculative nature.  Offsetting the gains from these announcements were disappointing earnings and forward guidance from Ameresco, Inc. (NASD:AMRC).

I discuss Ameresco's setback and other companies' progress after the performance chart.  10 for 14 Apr.png

Individual Stock Notes

(Current prices as of February 3rd, 2014.  The "High Target" and "Low Target" represent the ranges within which I predicted these stocks would end the year, although I expect a minority will stray beyond these bands due to unanticipated events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
Current Price: $14.04. 12/26/2013 Price: $13.85.   Annual Yield: 6.3%.  Low Target: $13.  High Target: $16. 
YTD Total US$ Return: 1.4%

Sustainable Infrastructure REIT Hannon Armstrong rallied strongly for the first three weeks of March, only to fall back as quickly at the end of the month, all without any news.  Eventually investors are going to recognize that HASI is a stable income stock which can be left in the back of a portfolio to gather dust and dividends.  Until that time, the volatility is giving late-comers a chance to acquire this income stock at a very attractive price.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
Current Price: C$5.60. 12/26/2013 Price: C$4.85.   Annual Yield: 4.5%.  Low Target: C$4.  High Target: C$6.
YTD Total C$ Return: 16.7%. 
YTD Total US$ Return: 12.9%

Green Building company PFB did not report any news of significance during March.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
Current Price:
C$3.84. 12/26/2013 Price: C$4.05. Annual Yield: 7.4%.  Low Target: C$3.  High Target: C$5.  
YTD Total C$ Return: 18.3%
.  YTD Total US$ Return: 14.4%

Independent power producer Capstone announced the long-awaited contract for its Cardinal co-generation facility with the Ontario Power Authority (OPA).   I discussed my expectation for this contract in detail last November in Capstone Infrastructure: The Bad News Is Priced In.  The actual contract seems to fall somewhere between my low estimate (the "Bad News") of the title and my "Expected" estimate. 

The crucial variable will be the plant's capacity factor (the percentage of time it is running and producing power), which will in turn depend on electricity and natural gas market conditions.  A fixed payment will cover Cardinal's fixed operating costs and return of capital, while the plant will operate whenever the spread between electricity prices and natural gas prices is sufficient for it to operate profitably.  Cardinal's relative efficiency will allow it to operate more frequently than other natural gas turbines, and its capacity factor is likely to increase as Ontario's Nuclear refurbishment program periodically takes much of that capacity off the market.

While there are clearly many moving parts, management is confident enough about the long term profitability of the new contract to maintain the current C$0.075 quarterly dividend. This will next be paid at the end of April to shareholders of record on March 31st.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
Current Price: C$5.44. 
12/26/2013 Price: C$4.93.  Annual Yield: 5.5%.  Low Target: C$4.  High Target: C$7. 
YTD Total C$ Return: 18.4%
.  YTD Total US$ Return: 14.4%

Waste heat recovery firm Primary Energy also announced a long awaited contract for its Cokenergy energy recycling plant.  There was not much doubt that this contract would be extended, and so the stock would not have moved much, except that that management also raised the quarterly dividend to US$0.08 from $0.06.  The next dividend payment is planned for May.

On an ongoing basis, this new dividend will amount to approximately 45% to 55% of distributable income, and so there may be room for further dividend increases after the end of Primary Energy's current investment program to refurbish the Cokenergy plant and increase its efficiency to take advantage of incentives in the new contract.

5. Accell Group (Amsterdam:ACCEL, OTC:ACGPF).
Current Price:
€14.86. 12/26/2013 Price: €13.59.  Annual Yield: 3.7%.  Low Target: 11.5.  High Target: €18.
YTD Total 
Return: 9.3% .  YTD Total US$ Return: 9.5% 

There was no significant news for bicycle manufacturer and distributor Accell Group.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
Current Price: C$11.33. 
12/26/2013 Price: C$10.57.  Annual Yield: 5.2%.  Low Target: C$8.  High Target: C$16. 
YTD Total C$ Return: 8.1%
.  YTD Total US$ Return: 4.5%.

Leading transit bus manufacturer New Flyer announced its annual results on March 19th. Last quarter earnings were very strong, but first quarter 2014 earnings will be very weak due to some contracts signed during the extremely weak bus market in the couple of years after the financial crisis.  Going forward, management feels the current bidding environment is "normalizing" and they have been able to raise their prices in some cases. 

Overall, the company  seems to be setting the stage for long term growth, as they consolidate their acquisitions and roll out new products, such as their recently developed mid-sized ("MiDi") bus for private shuttle fleets. Several insiders made significant purchases of stock following the annual report, reconfirming my view that short term weakness is providing a buying opportunity before what I expect to be strong performance in the coming few years.

7. Ameresco, Inc. (NASD:AMRC).
Current Price: $7.67
12/26/2013 Price: $9.64.   Annual Yield: N/A.  Low Target: $8.  High Target: $16. 
YTD Total US$ Return: -20.4%.

Energy performance contracting firm Ameresco announced its annual results on March 13th.  Ameresco had disappointing Q4 earnings due to a low margin mix.  More importantly, management's outlook for 2014 does not anticipate improvement this year.  They may be being cautious, but after two years of saying that a turn around in the performance contracting climate is just around the corner, it's no surprise the stock sold off sharply on the weakened outlook.

Even if investors have been losing faith in the company, founder, Chairman, CEO, and largest shareholder George Sakelleris bought 246,000 shares of stock between $7.50 and $8 following the earnings announcement, demonstrating he still has faith in the firm's long term prospects.

8. Power REIT (NYSE:PW).
Current Price: $9.09
12/26/2013 Price: $8.42Annual Yield: N/A.  Low Target: $7.  High Target: $20.
YTD Total US$ Return: 8.0%

Solar and rail real estate investment trust Power REIT successfully listed its series A preferred shares (NYSE:PW-PA.) The funds will be used to fund the equity portion of an acquisition of land under a solar farm which was announced in January.

9. MiX Telematics Limited (NASD:MIXT).
Current Price: $10.73.
12/26/2013 Price: $12.17Annual Yield: N/A.  Low Target: $8.  High Target: $25.
YTD Total US$ Return: -11.8%

Global provider of software as a service fleet and mobile asset management, MiX Telematics, continued to fall along with other emerging market stocks.  I continue to feel the decline is unwarranted due to the global nature of MiX's revenues.  Declines in the South African Rand help the company more than hurting it because they reduce expenses much more than revenue.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
Current Price: C$0.31
  12/26/2013 Price: C$0.28.   Annual Yield: N/A.  Low Target: C$0.20.  High Target: C$0.60.
YTD Total C$ Return: 10.7% .  YTD Total US$ Return: 7.0%.

Renewable energy developer and operator Alterra Power announced 2013 annual results.  There were few surprises.  Going forward, the company will be focusing its development efforts on a recently acquired Texas wind farm rather than its British Colombia hydropower projects, where BC Hydro has been working to reduce its commitment to new power projects rather than bring projects on line.

Two Speculative Penny Stocks for 2014

Speculative Apr.png

Ram Power Corp (TSX:RPG, OTC:RAMPF)
Current Price: C$0.065   12/26/2013 Price: C$0.08.   Annual Yield: N/A.  Low Target: C$0.20.  High Target: C$0.60.
YTD Total C$ Return: -18.8% .  YTD Total US$ Return: -21.5%.

Geothermal power developer Ram completed the remediation of its San Jacinto-Tizate project on January 22nd, and stated it would to complete a plant capacity test in March.  We're still awaiting the results of that test, and the stock has been selling off because of the delay.

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
Current Price: C$0.12   12/26/2013 Price: C$0.075.   Annual Yield: N/A.  Low Target: C$0.20.  High Target: C$0.60.
YTD Total C$ Return: 60% .  YTD Total US$ Return: 54.7%.

Wind project developer Finavera announced the execution of agreements with BC Hydro to transfer the Electricity Purchase Agreement for its Meikle Wind Energy Project to Pattern Energy Group (NASD:PEGI.)  This was excellent news for Finavera's long-suffering investors, not the least because the project had been re-designed to accommodate 184 MW of wind turbines, a configuration which will ensure the largest possible payment from Pattern. 

I looked into the details of this deal here, estimating that the company was worth between C$0.21 and C$0.40 a share, most likely somewhere in the lower half of that range.

Final Thoughts

I'm disappointed that Ameresco's investors will likely need yet more patience before we see significant signs of life return to the company's stock.  However, Primary Energy, Capstone Infrastructure, and Finavera Wind Energy all showed this month that long patience is sometimes rewarded. 

Disclosure: Long HASI, PFB, CSE, ACCEL, NFI, PRI, AMRC, MIXT, PW, AXY, RPG, FVR.

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

March 31, 2014

Finavera Wind Energy: Bak From The Dead

Tom Konrad CFA

Disclosure: Long FNVRF, short PEGI $30 and $35 calls, $20 and $25 puts.

The Good News

Finavera Wind Energy (TSXV:FVR, OTC:FNVRF) shareholders have had a long and trying wait for the sale of its wind projects to Pattern Energy Group (NASD:PEGI) since the deal was announced in December 2012.  The timeline has slipped repeatedly, two of the projects proved impossible to permit, and there have been questions about just how large the remaining ones would be.  The long silence since the company’s interim financial update last November has probably led many investors to give the company up for dead.

Rumors of the company’s demise were premature.  On March 17th, Finavera announced that it had “executed agreements that provide for the Assignment of the 184 MW Meikle Wind Energy Project Electricity Purchase Agreement (‘Meikle EPA’) from Finavera to Pattern.  The assignment of the Meikle EPA from Finavera to Pattern is the last major milestone outstanding to close the Pattern acquisition of the Meikle project for gross cash consideration of $28 million.”

The key numbers here are 184 MW and $28 million.  Those correspond to a strong wind regime at Meikle, allowing the Meikle and nearby Tumber Ridge projects to be consolidated into one giant “Super-Meikle” project.  I spoke to Finavera CEO Jason Bak by phone later the same day, and he confirmed that this was the case.  There is  a wind speed adjustment in the contract with Pattern which could reduce the $28 million figure by $1 to $2 million.

The 116MW of PPAs which the announcement stated had been canceled are likely the Wildmare (77 MW), Bullmoose (60MW), 47 at Tumbler Ridge (47MW)  projects, after allowing for the 67 MW expansion of Meikle over the earlier 117 MW plan.  Bak says Meikle was re-designed and expanded to accommodate additional turbines.  While the other three PPAs have been canceled, other permits remain in place.  Over the longer term, Finavera could yet see some revenue from Wildmare, Bullmoose, or Tumbler Ridge.

The announcement is unadulterated good news.  More confirmation can be had that this is a better-than-expected outcome in Pattern’s 2013 Annual Report, page 63 of which conservatively lists the Meikle project as a 175 MW (not 184 MW) pre-construction project.

Timeline

Bak tells me that he expects the Meikle sale to close in the next few weeks, which will trigger a $10 million payment from Pattern to Finavera, which Finavera will use to repay the project loan from Pattern made last year.  In addition to that $10 million, Pattern has demonstrated its confidence that this project will go forward by spending $4 million in development costs to date.  An additional $2 million may be spent to bring the project to financial close in late 2014 or early 2015.  All but $2 million of this $4 to $6 million of this will be deducted from Finavera’s final payment, but Pattern will not be reimbursed for these expenses if the project does not close.

Valuation

The 184 MW project size and $28 million (elsewhere $27.9 million – $26.5 after wind speed adjustments) gross payment remove the largest piece of uncertainty regarding Finavera’s value going forward.   Below, I give my estimates Finavera’s net cash position after Meikle’s financial close and the final Cloosh payment over the next six to twelve months.

Assets: (Canadian $ except €)

Expected proceeds from Pattern: $26 million to $27.9 million, after wind speed adjustments.

Expected Payment for Cloosh Wind Farm: €7.14 ($11. million.)  This project has also been delayed, and is now expected to close in 2014.

Value of 10% interest in Cloosh: $3 million to $4 million

Other potential upsides:

Potential value in Wildmare, Bullmoose, or Tumber Ridge.

Value in the new business opportunity Bak plans to present to shareholders after the Pattern sale is finalized in the next few weeks.

Liabilities:

Liabilities on Interim Report: $24 million to $26.9 million (the low end may result through negotiations with creditors.)  $2.4 million of these liabilities are secured by Cloosh, and are payable only from the proceeds from Cloosh.

Finavera’s share of Meikle development  costs: $2 million to $4 million, payable out of final Meikle incentive payment.

Net

$9 million to $17 million. My best guess: $12 million.

Shares Outstanding

39.7 million

Options Outstanding

2.46 million at $0.085.  (42.2 million shares outstanding if exercised for $0.21 million.)

Value Per Diluted Share

$0.21 to $0.40 ($0.19 to $0.36 US).  Best guess: $0.28 ($0.26 US)

The future

The press release also stated that

Finavera continues to work diligently on a strategic plan for the Company. The imminent close of the Pattern transaction will provide a solid platform for the next stage in Finavera’s development. Further information on the Company’s strategic plan will be released following the close of the Pattern transaction.

As Bak has said all along, there will be a shareholder vote on the use of the proceeds, including the option to return them to shareholders.  He has been working on the strategic plan mentioned above for at least half a year.  He told me that he has not been willing to bring it to shareholders until he has the working capital to pursue the opportunity.  Bak seems very confident that shareholders will like the strategic plan when they see it.  If they don’t, they will have the opportunity to vote for a cash distribution from the wind farm proceeds, instead.

Bak also told me that he expects to issue more frequent updates on the company’s prospects over the coming months.

Conclusion

Given the years of delays and disappointments, it’s not surprising that Finavera’s stock has been trading at only 8 Canadian cents.  I expect that the elimination of a major source of uncertainty and the final size of the Meikle project will finally breathe life into the stock.  More frequent updates from the company going forward may also bring investor interest “Bak” from the dead.

This article was first published on the author's Forbes.com blog, Green Stocks on March 18th.

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.

Continue reading "Finavera Wind Energy: Bak From The Dead" »

March 30, 2014

SolarCity: Overpriced or Opportunity?

Does SolarCity (SCTY) look like a good investment at current prices? The most recent financials released by SCTY fills out the picture of how this unique company performed for 2013. Do the numbers justify the outsized stock performance, which has risen 222% in the past 12 months, and 384% since its Initial Public Offering in December 2012? Or on the other hand, are recent filings more reflective of the 42% drop since the highs of a month ago? This article will follow the data to see where this distinctive energy stock stands now, and forecast where this dynamic solar company may go from here.

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Figure 1. SolarCity Revenues.

SolarCity Revenues Are Climbing…

First the good news: sales have been steadily gaining for SCTY. Figure 1 shows that sales, or revenues, are up 29% from 2012 levels, and almost triple what they were in 2011. Revenues came in at the high end of projections made in November 2013. Gross profits, accounting costs of revenue such as operating leases, incentives and sales (but not expenses or other losses), have also been growing.

…But Profits Are Falling

Profits for the company, however, are a different story. Figure 2 shows that net losses have been growing, over double now what they were in 2011. Figure 1 points out that revenues are not the problem, it is the expense side of the ledger keeping the company in the red. This divergence between revenues and net income, can clearly be seen on a quarterly basis in Figure 3.

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Figure 2. SolarCity Losses.

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Figure 3. SolarCity quarterly revenue and income.


Classifying SolarCity Debt

It is always beneficial to look at debt when evaluating a company’s financial health. When debt ratios are compared to industry-wide levels, a clearer picture emerges of whether a company is successfully deploying debt, or if it is swimming in financial liabilities.

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Figure 4. SolarCity total liabilities to total assets.
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Figure 5. SolaCity current ratio.

This type of comparison poses a challenge for SolarCity, because it is a hard company to classify. Most financial websites mistakenly put SCTY in the semiconductor industry, since the majority of solar companies are in this business sector. The SEC classifies SolarCity in Construction Special Trade Contractors which is partially true, but does not fully cover its business model.

I see SolarCity more as a financial company, because of the way it interacts with its clients through financing, lease arrangements, notes, etc, and how those instruments appear on the liability side of its balance sheet. Additionally, looking at debt for financial companies is different from other sectors. In many ways, their business is debt. This is all the more reason why classifying SCTY correctly is important when making industry comparisons.

Figures 4 and 5 show how SCTY stacks up against debt levels of the industries mentioned above. The ratio of total liabilities/total assets has been consistent for SolarCity over the years, and came down slightly in 2013. Though SCTY is higher than semiconductors and construction services, it is well below the average for the financial sector.

The current ratio is a measure of a company’s shorter-term debt, and the higher the number the better. On this measure, SolarCity appears to be more of concern when compared to industry averages.

clients_scty_20140326.jpg

Figure 6. SolarCity client growth.


SolarCity Client Growth

Despite the difficulties outlined above, there is much that SolarCity has been doing right. Figure 6 shows how SCTY has been successfully executing its business plan by growing its customer base at an extremely rapid pace. Keeping up this growth is essential to becoming profitable, and SCTY shows no signs of slowing its expansion.

If you dig in to these numbers more deeply, however, a mixed story again emerges. As seen in Figure 7, total revenues per customer have been steadily declining. This is to be expected. As SolarCity moves more and more into home and small business installations, revenues per customer get diluted when compared to its larger utility-scale clients. So long as client growth continues at a decent pace, falling total revenues per customer is not a grave concern.

client_ratios_scty_20140326.jpg

Figure 7. SolarCity client ratios.


Net revenues per customer have also been improving for SCTY. In a company’s early stages, net loss per customer should shrink as revenues grow. This has been the case, with levels in 2013 about 31% better than 2012. It is crucial that this ratio continue to improve if SCTY hopes to get in the black in a timely fashion.

A key way to see how this is progressing is to watch SolarCity’s acquisition cost per customer. This ratio has been shrinking, but not at the pace one would hope. In fact, in 2013 acquisition cost per customer seems to have stabilized at 2012 levels. I will be watching this number very closely to evaluate when, or whether, SCTY will be on track to turn a profit.

Overpriced or Opportunity?

Without having access to SolarCity’s inner cogs, my back of the envelope calculations show that the company may be many years out until it enters into positive earnings territory. If total revenues per customer levels out in the $1,500 range, and operating expenses stay at current levels, then SolarCity will need to double the +/-100,000 clients that it currently has before it turns a profit. Even at the current rapid rate of client growth, it would take SolarCity two years to get to the 200,000-client level.

SolarCity has a lot of moving parts, so it is surely possible that revenues could advance quicker than my estimates, and/or expenses could become much tamer. In addition, SolarCity’s business model is quickly evolving, so unknown developments may greatly change its financial landscape. SolarCity is likely priced to perfection at current levels, but I would not discount this company as a profitable long-term investment.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

March 29, 2014

Gevolution 2014: Gevo's Progress, And Detours

Jim Lane
gevolution-2014[1].png

This week, Gevo (GEVO) reported its year-end results, generally in line with expectations, with a $0.35 loss per share and $24.6M in the bank. Given the company’s rate of progress with isobutanol, the cash burn rate, the low share price, and high prices for ethanol — the company announced that it is “transitioning the Luverne plant to the production of both isobutanol and ethanol…Producing both ethanol and isobutanol allows Gevo to fully utilize the Luverne plant and increase cash flow as Gevo continues to commercialize its isobutanol production capabilities.”

“Our original vision was to focus our efforts on one product,” said CEO Pat Gruber. “However we now are confident that we can leverage the flexibility of our technology and more fully utilize all the operating units in the plant to produce ethanol simultaneously with isobutanol. Needless to say, the expected additional cash flow is a benefit as we work to maximize the learning per dollar as we scale up our technology.

“Therefore, we plan to run three of our fermenters to produce ethanol, while the fourth fermenter will remain dedicated to isobutanol production. We are calling this configuration “side by side”, meaning both ethanol and isobutanol could be produced concurrently.

Analyst reaction

Rob Stone and James Medvedeff, Cowen & Co:

The economics now favor, and the science now enables, concurrent production of isobutanol and ethanol at Luverne. However, we believe ramping to full nameplate, regardless of configuration, is still at least several quarters away.

Luverne is shifting to concurrent production of ethanol and isobutanol, to take advantage of current wide ethanol spreads. The initial mix will be three fermenters producing ethanol, one producing isobutanol. We believe this demonstrates the flexibility of the GEVO technology, and highlights successful isolation and eradication of sources of infection. It may have been influential in attracting the two licensing LOIs signed since October. Important side benefits include more stable flows of corn mash, water recycling, and solids removal (animal feed) from the plant, the opportunity to optimize operations at higher production rates, and reduced cash burn.

Mike Ritzenthaler, Piper Jaffray

The decision to produce ethanol ‘side-by-side’ with increasing isobutanol production rates will be controversial – but ultimately we view as a positive for cash (with spot ethanol EBITDA margins >$1/gallon) and provides more stable operating parameters. This will further aid isobutanol optimization efforts that have seen ~71% of target gallons per batch and a lift to 1-2 batches per week on average (from 1-2 batches per month in December). We are adjusting our estimates due to incremental ethanol sales that we did not previously factor into our model.

We expect ethanol production to start in mid-May and reach a 15k gallon/year run-rate starting in 3Q13, resulting in FY2014 Sales of $45 million. Ultimately, however, we see ethanol production at Luverne tailing off in 1H15 as isobutanol continues to ramp. This results in FY14E revenues of $45.4 million (from $14.5 million) and ($20.7) million in EBITDA, from ($36.5) million previously.

This should make the technology package more attractive to potential licensors while investors should welcome the cash flow attributes of ethanol production as isobutanol production ramps, in our view. Our price target is based on 5x our FY15 EBITDA estimate (from FY15 EBITDA discounted to 2014), with $0 million in net debt and 49 million shares.

Progress with the Process

Gevo reported in this cycle the following process improvements:

• Commissioned a proprietary system to sterilize corn mash.
• Proven that its two key technologies, our isobutanol producing yeast and our GIFT system, work at commercial scale utilizing full corn mash to produce isobutanol.
• Achieved up to 71% of our targeted gallons per batch goal.
• Produced isobutanol that met quality targets.
• Demonstrated that the company can manage infections during fermentation, achieving over 100% of goal, although not with the consistency or reliability that we need.
• Operated all of the fermenters and GIFT systems and they performed as expected.
• Begun the integration of the water recycle streams, and achieved greater that 90% water recycle in fermentation.

The Licensing Option

On March 6, 2014, Gevo announced that Porta Hnos signed a letter of intent to become the exclusive licensee of GIFT in Argentina to produce renewable isobutanol. Porta is a 131 year old family owned company in Argentina that produces liquor, vinegars and has a 120 m3/day corn ethanol plant (approximately 12mgpy).

In addition, Porta has designed and built two 250 m3/day ethanol plants for others and they are working on two more ethanol plants for 2014. Half of all current ethanol plants in Argentina were designed by Porta, and they have a joint venture with Alpha Laval to provide separation and evaporation expertise.

Offtake and testing: the Q4 highlight reel

In Q4 2013, Gevo began selling bio-isooctane for specialty fuel applications such as racing fuel. Gevo’s renewable isobutanol from Luverne, Minn. is being converted into bio-isooctane at its biorefinery at South Hampton Resources. Initial volumes are being used for testing purposes.

Also in Q4 2013, the U.S. Army has successfully flew the Sikorsky UH-60 Black Hawk helicopter on a 50/50 blend of Gevo’s ATJ-8 (Alcohol-to-Jet). This testing is being performed as part of the previously announced contract with Gevo to supply more than 16,000 gallons to the U.S. Army. Gevo’s patented ATJ fuel is designed to be the same as petroleum jet fuel, and to be fully compliant with aviation fuel specifications and provide equal performance, including fit-for-purpose properties.

In December, Gevo announced that Underwriter Laboratories approved the use of up to 16% isobutanol in UL 87A pumps, providing all of the service stations across the country with the assurance that isobutanol blended gasoline will work in their current gasoline pumps without the need to purchase new equipment.

The Move to Ethanol

Let’s be frank about this — for a long time, Gevo has taken a dim view of the first generation biofuels it now proposes to produce. “1st generation biofuels created conflict,” the company noted earlier, citing that refiners lose volume, pipeline companies lose volume, customers get lower energy fuel and ethanol producers struggle with the blend wall, with the push for ethanol causing more conflict.”

gevo-032814-1[1].png

The company switched “back to ethanol” once before, in fall 2012, at the time its contamination difficulties were becoming more apparent at scale. “Gevo has successfully demonstrated commercial scale isobutanol production, has navigated idiosyncratic biocatalyst challenges in past scale-ups, and elected to utilize the Luverne asset while the contamination controls are optimized,” Piper Jaffray analyst Mike Ritzenthaler wrote in 2012. Adding, that “the biologists are working to improve the production strain and fermentation parameters to enable better control of competing reactions, a process that in our experience will take a handful of months at most to optimize.”

“The switch to ethanol does not reflect any change in strategy,” Ritzenthaler added. “Management is electing to operate the facility rather than conduct the strain improvement at such a large-scale.”

Having noted all that, Gevo has been consistent in touting the “carbohydrate market” and superior US productivity in this regard, compared to the oil market — as much or more as they have waded into the ethanol-or-isobutanol question.

Doubtless, given normal price environments and steady-state operations in ethnaol and isobutanol, they would generally produce isobutanol. The switch to ethanol reflects the “Market opportunity driven by the spread between carbohydrate and oil” as they have detailed in many presentations. With oil topping $100 and corn sub-$5, Gevo is clearly seeing that the time to produce alcohols is now — and if isobutanol is not yet ready for immediate scale-up, the other alcohol will do nicely.

gevo-032814-2.png

But there’s a caveat in their strategy. Spreads are high, but they vary, and often quickly. CEO Pat Gruber has been out front with the industry on warming about the dangers of selling the “same” molecule with the “same” price and performance, as this slide illustrates.

gevo-032814-3[1].png

Further to that point, one has to consider how much damage has piled up on the Gevo “brand” over the past two years, with the well-publicized difficulties in getting to full production at Luverne — while discussions of a conversion at Redfield seem to have pushed off into the distance. On the potential for selling into markets with a damaged brand, Gruber was stark in his assessment, here:

gevo-032814-4[1].png

Gevo’s legion of admirers will be quick to point out that the company’s struggles are not untypical for introducing first-of-kind technology, and they are temporary in nature — causing delays rather than failure — and that the brand of the company is strong with partners like Coca-Cola and the US Army. With a strong brand, Gruber took the view that even a “same” product at the “same” price and performance could have very strong sales prospects, here.

gevo-0328-5[1].png

The delays with isobutanol

The delays have been, for its investors and stakeholders, frustrating to say the least. Two years ago, the company was “on track for isobutanol production in 2012″ and expected to be bringing Redfield online in 2013.


gevo-032814-9[1].png

We didn’t hear much back then about the time delays associated “Learning to run a ‘new-to-the-world’ process at the scale of our Luverne plant with 1 million liter fermenters requires a lot of work. Working through the issues that arise creates the crucial know-how needed for steady full scale production, expansion, and licensing,” as Gevo reflected on its progress in its latest update.

The company’s strong management team — especailly in managing start-ups with first-of-kind-technology — caused many to underestimate the challenges of scaling this technology. “While every novel process startup contains some uncertainties, we believe Gevo has an outstanding team in place with the optimal expertise needed to understand and mitigate risks – and meet or exceed important production milestones between now and the end of the year,”

Piper Jaffray analyst Mike Ritzenthaler wrote in May 2012. He added in July: “Based on our background and observations, we believe startup is proceeding remarkably well, and we are confident that Gevo’s team can quickly handle normal startup issues, should they arise.”

The biojet options

The company’s struggles with isobutanol have to some extent overshadowed its successes with biojet fuel — passing Army tests with flying colors, and proceeding rapidly towards an adoption of an approved ATJ (alcohol to jet) fuel spec in the not-distant future. The company’s South Hampton demonstration plant has been supporting those efforts.

gevo-032814-6[1].png

The isobutanol option

The company would like to produce all-isobutanol no doubt about it: as Pat Gruber pointed out, “isobutanol and its derivatives can serve multiple large markets.” But here’s the caveat, he warned in 2013: “low cost isobutanol is the enabler,” and frankly, Gevo’s yields and throughput is keeping its isobutanol out of all those juicy verticals.

gevo-032814-10[1].png

The Bottom Line: the vital importance of getting back to isobutanol

Let’s be clear about restating this: Gevo has never spun a story about a “single molecule” strategy. But they simply have not showcased their ethanol capabilities in this respect. Ethanol has been a sub-optimal fallback. They’ve been much more excited about opportunities with isobutene and renewable jet fuel, for example.

gevo-032814-12[1].png

Why? As Gruber warned the industry at ABLC 2012, “drop-in fuels can realign value chains. Refiners gain volume, pipelines too. Downstream logistics costs decrease, consumers get a better product, and there’s no blend wall.”

gevo-032814-8[1].png

As we outlined in the Bioenergy Project of the Future series, staring with a first-generation ethanol plant is a great idea. Stating with that technology a while while other technologies are introduced: that’s fine, for a while, But falling back on first-generation fermentation is not a demonstration of production flexibility, in a 19 million gallon facility that is unlikely to be able to compete with the likes of POET and its fleet of 100 million gallons plants, based on economies of scale.

So, this is a temporary move, based around cash conservation, aimed according to analyst estimates at improving EBITDA by an estimated $15.8M in 2014. Coincidentally, about the same amount of capital the company parted with in early 2013 in a $15M share buy-back program. The company also takes the view that it helps to solidify its licensing story, by giving licensees a side-by-side production opportunity in isobutanol and ethanol.

We’re a little skeptical, here in Digestville, about the long-term value of that strategy. Short-term, while the company works through what is proving to be a 3-year scale-up effort, it makes sense. Should ethanol prices hold up, it will certainly help with earnings and cash – though it will tie-up talent, working capital, and divert the focus to some extent. We’ll see shortly how Gevo navigates those waters — as it continues to make steady, if slow, progress towards its game-changing isobutanol ambitions.

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

March 28, 2014

Solazyme Launches Biodegradable Encapsulated Lubricant For Drilling Market

Jim Lane

Enters oil & gas drilling market with world’s first encapsulated lubricant.
Solazyme: “Targeted delivery technology provides improved performance and sustainability.”

In California, Solazyme (SZYM) announced its entry into the oil and gas drilling fluids additive market. Building upon its proprietary platform of high performance, sustainable Tailored oils, Solazyme has introduced Encapso, the world’s first encapsulated biodegradable lubricant for drilling fluids designed to deliver high-grade lubricant precisely at the point of friction where and when needed most.

At the same time, the company announced its intent to offer $100M in aggregate principal notes due in 2019 and 5M shares of common stock. SZYM will also grant the underwriters a 30-day option to purchase up to $15M in notes and 750k shares of common stock.

“We expect the deal to be completed by the end of the week,” said RW Baird analysts Ben Kallo and Tyler Frank. “Although initially dilutive, it should provide sufficient capital to ramp production at its facilities and fund further R&D.” The analysts put a $18 price target in SZYM shares, which closed on March 25 at $13.09.

The drilling fluids markets

The global market for drilling fluids was valued at $7.2 billion in 2011 and is expected to reach $12.31 billion by 2018, according to a report released last summer by Transparency Market Research.

The rise in unconventionals and the growth in deep-sea exploration have driven up revenues for drilling fluids in recent months. One factor that has limited the use of conventional oilbased fluids (as opposed to water-based fluids) have been environmental and sustainability concerns associated with conventional oils.

According to Solazyme, Encapso’s efficacy has been demonstrated both in the lab and in the field in over a dozen commercial wells in a number of basins including the Williston Basin, Denver-Julesburg, and the Permian Basin. Encapso increases drilling speed and control, and protects valuable equipment.

The majority of work so far has been done in horizontal wells, helping demonstrate Encapso’s strong performance capabilities when it comes to “building the curve”—or the point where an unconventional well transitions from vertical to horizontal. This is often when drilling engineers find the most difficulty managing drilling friction. Improving the speed and efficiency of drilling translates directly to cost savings for well operators.

“The demand for energy continues to grow but new sources of fossil fuels are more difficult than ever to recover. As long as the oil and gas industry continues to extract fossil fuels, we at Solazyme view it as an imperative that it is done in a more sustainable way to protect the environment for generations to come,” said Solazyme CEO Jonathan Wolfson. “The drilling industry needs new high-performance and sustainable technologies to meet rising energy demand and increased drilling. Encapso’s unique targeted lubricant delivery system helps reduce the costs for the oil and gas exploration and production industry and provides improved drilling performance.”

Reaction from the customers

“After adding Encapso to the system we saw a rate of increase in our rate of penetration from two feet per hour to 40 feet per hour. Encapso is a game changer because you’re reducing your torque, reducing your drag, and reducing your coefficients of friction all at the same time,” said Philip Johnson, a senior drilling engineer who worked with Encapso on behalf of a major exploration and production company. “No other product on the market does that.”

”Our observation of the product is that it has consistently added value,” said David Cunningham, Regional Manager at Anchor Drilling Fluids, USA. “The biggest impact has come when we’ve seen increases in rate of penetration and reductions in torque.”

“When I learned that this lubricant was encapsulated and therefore would deliver a drilling lubricant in a more targeted way, I saw the tremendous potential benefits,” said Tony Rea, President of Arc Fluids. “I introduced Encapso to a few customers and worked with them on several wells that they were drilling. In all cases, we witnessed marked improvements in directional control.”

The Analysts on Encapso

“Entering into the oil and gas drilling fluids additive market provides SZYM another end market for its products,” write Ben Kallo and Tyler Frank at RW Baird. “This will be important as the company ramps production at its Clinton and Moema facilities. We believe SZYM should be able to secure offtake agreements for the Encapso product line after successfully testing the product in the Williston Basin, Denver-Julesburg, and the Permian Basin and receiving positive feedback from Anchor Drilling Fluids and Arc Fluids.”

The Bottom Line

Another market for Solazyme — and a large one — and one in which high-performance and high-sustainability are known factors for driving revenues. If the company gets real traction in this field, its planned capacity will have to be revised northwards. Towards which its pending cap raise will materially contribute.

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

March 27, 2014

Our Investments Matter

Tom Konrad CFA

Many people consider themselves to be moral, but also feel morality has no place in investing.

There is much argument about whether “Socially Responsible Investing” helps or harms returns, but it is not a moral argument.  Some people believe gambling is immoral, others don’t.  Neither group makes a distinction between the morality of gambling winnings and gambling losses.

The main moral argument people make against socially responsible investing is that buying or selling a few shares of stock won’t have a real effect on giant corporations.  The added emotional distance many people get from investing through mutual funds or ETFs makes this easier to believe.

The question deserves direct scrutiny:

Do the stocks or mutual funds we buy affect the management of the companies we invest in?

This question has two parts.

  1. Do our investments affect stock prices?
  2. Does the stock price affect management behavior?

A company’s stock price is the net result of all investors’ decisions. We’re really asking if a single purchase has a significant effect. This is like asking if throwing a hamburger wrapper out our car window makes a difference. It’s wrong, regardless of if the road is covered with trash or pristine.  A litterbug may be subject to legal fines, but the limited liability structure of modern corporations protects investors from the legal (but not financial) consequences of corporate behavior.  If there is such a moral structure, it is the belief that our investments don’t make a difference in corporate behavior.

How much a company’s stock price affects its behavior depends on how much it needs money. Certain types of companies, like Master Limited Partnerships and Real Estate Investment Trusts must return profits to investors. Others are not profitable enough to fund planned investments. If such companies want to survive or grow, they must obtain the funding from investors. The stock price is always important to such companies because it determines how much control and what share of future profits they must exchange for the needed funds.

For all companies, including profitable ones, a high stock price increases management pay via share options and stock ownership. A low stock price makes a company vulnerable to activist investors and hostile takeover bids. These seek to influence management, or replace it altogether. Managers like high pay, autonomy, and keeping their jobs. If they expect a business decision will cause investors to sell, they will avoid it.

In short, our investments collectively set the stock price, and the stock price influences corporate behavior.  The same applies to bonds and other securities, through the interest rates companies pay.

We may be tiny actors on a giant stage, both in our personal lives and our financial lives. We don’t litter even if we think no one will notice, and we shouldn’t buy companies that do harm even if we think our a single purchase won’t get management’s attention.

Collectively, we have power.  With collective power comes collective responsibility.

This article was first published on the author's Forbes.com blog, Green Stocks on March 16th.

March 26, 2014

China, EU Reach Solar Settlement But More Defaults Loom

Doug Young

China and the European Union have reached a new settlement that should formally end their ongoing dispute over solar panels, contrasting sharply from a more confrontational tack taken by the US in a similar spat. Meantime in other solar news, a looming new bond default by a mid-sized panel maker has become the latest sign that Beijing is prepared to let more of these smaller companies miss their debt payments. That approach will force these smaller firms to either leave the industry or sell their money-losing operations to larger peers, in a much-needed industry consolidation.

Let’s start with the latest China-EU settlement, which involves polysilicon, the main ingredient used to make solar panels. Beijing opened an anti-dumping investigation into EU polysilicon in late 2012, a move that many saw as retaliatory for an earlier EU probe that found Chinese solar panel makers were selling their products in Europe at unfairly low prices. The original dispute centered on complaints by both the US and Europe that Chinese solar panel makers were undercutting their western rivals after receiving unfair government support in the form of subsidies like low-cost land and cheap loans.

China and Europe settled their initial dispute over solar panels last year, in a landmark deal that saw Chinese manufacturers agree to raise their panel prices to a minimum level agreed to by both sides. (previous post) Now this latest agreement will see European polysilicon makers also agree to sell their products into China at a minimum price agreed to by both sides. (English article) The main beneficiary of this new deal is Germany’s Wacker Chemie, which is Europe’s main polysilicon seller to China.

The EU’s 2 settlements contrast sharply with the approach taken by the US, which conducted its own investigation and last year imposed anti-dumping tariffs on Chinese solar panels. As a result, China opened its own probe into US polysilicon, which ended this year with retaliatory anti-dumping tariffs against US-made polysilicon.

On the one hand, I should applaud the EU for its more reasonable and pragmatic approach to this matter, even though the setting of minimum prices has nearly the same effect as imposing punitive tariffs. But that said, I do also think the US approach sends a stronger message to Beijing that it needs to stop its practice of giving money to industries it wants to promote. Perhaps this mixed approach by the US and Europe is the best way to send the message to Beijing, providing both positive and negative incentives to change its behavior.

From that solar dispute, let’s look quickly at the latest looming bond default from smaller panel maker Baoding Tianwei (Shanghai: 600550). The company has announced that trading of 1.6 billion yuan ($260 million) worth of its bonds has been halted on the Shanghai Stock Exchange. (English article; company announcement) Tianwei has lost big money for the last 2 years, so it’s not a huge surprise that it might not be able to repay its debt. The bigger surprise is that it might be allowed to default on the bonds, since Beijing or local governments often come to the rescue of companies that risk debt defaults.

We saw something similar happen earlier this month when Chaori Solar (Shenzhen: 002506), another smaller player, failed to make an interest payment for some of its bonds, becoming the first corporate bond default in modern Chinese history. (previous post) This latest case involving Tianwei shows that Beijing is preparing to allow more such defaults on solar debt. That should ultimately force many of these smaller players to either shut down or sell their operations to larger players like Canadian Solar (Nasdaq: CSIQ) and Trina (NYSE: TSL), which are emerging as industry consolidators.

Bottom line: Europe’s latest solar settlement with Beijing will end their trade dispute in an amicable way, while a new looming bond default by Tianwei reflects China’s ongoing resolve to consolidate the sector.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

March 25, 2014

AMSC Consolidates US Wind Operations To Focus on Europe

Meg Cichon

AMSC (NASD:AMSC) will shutter its manufacturing facility in Middleton, Wisconsin by the end of 2014, but hopes to fold its product development operations and employees that are willing to relocate into its headquarters in Devens, Massachusetts, which recently underwent a workforce reduction.

While it consolidates its U.S. workforce, AMSC plans to open a new wind turbine controls manufacturing facility in Timisoara, Romania in 2014, which will serve all of its clients outside of China. Its Chinese facility will continue to cater solely to China customers. With this move, AMSC corporate communications manager Kerry Farrell said it has better access to reach its “target market" of Eastern Europe and allows it to be closer to its Austria facility. According to the REW 2014 wind outlook, there is much promise in emerging northern and eastern Europe despite overarching policy uncertainty.

“By expanding our manufacturing footprint into Eastern Europe, we are enhancing our distribution capabilities and our global reach in a region that is a target market for our wind and grid products," explained AMSC CEO Daniel P. McGhan. "Romania is a European Union member state and cost-efficient manufacturing location with a highly skilled workforce and reliable infrastructure.”

Overall, AMSC said these changes will reduce its workforce 5-10 percent from its 330 total employees as of March 2013. The transition process will cost the company anywhere between $4-6 million by the end of 2014. However, it expects these changes to ultimately save the company $3 million annually, and to be cashflow positive by its fourth fiscal quarter, said Farrell.

Meanwhile, AMSC continues to struggle in court with wind turbine manufacturer Sinovel after it accused the Chinese company of stealing its intellectual property in 2011. AMSC has filed four separate lawsuits and is seeking more than $1.2 billion in damages against what used to be its largest customer. According to Bloomberg, China Supreme Court recently ruled in favor of AMSC in two of its suits, and the cases will be heard in court, rather than being moved to arbitration at Sinovel’s request. Despite the litigation, AMSC continues to focus on product development.

"Key to our growth strategy is product development and the development of system solutions...[yesterday’s] action will help to ensure that we are in the best position to deliver these products to market," said McGhan. "The strategic initiatives we are announcing today mark the beginning of a new chapter for AMSC as we focus more intently on manufacturing and product development across all lines of our business.”

Meg Cichon is an Associate Editor at RenewableEnergyWorld.com, where she coordinates and edits feature stories, contributed articles, news stories, opinion pieces and blogs. She also researches and writes content for RenewableEnergyWorld.com and REW magazine, and manages REW.com social media.  Formerly, she was an Associate Editor of ideaLaunch in Boston, MA. She holds a BA in English from the University of Massachusetts and a certificate in Professional Communications: Writing from Emerson College.

This article was first published on RenewableEnergyWorld.com, and is republished with permission.


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