February 19, 2017

A Better Battery Or Bust

by Debra Fiakas CFA

Last month BioSolar (BSRC:  OTC/PK) reported positive test results for its proprietary energy storage technology.  The company is developing an alternative anode material for lithium ion batteries using silicon-carbon materials.  BioSolar’s engineers are targeting dramatic improvement in anode performance and equally impressive reductions in cost.  If they are successful, it could mean longer lithium ion battery life, greater capacity and shorter charging time  -  the dreams of every manufacturer with an electronic product.

Most lithium ion batteries rely on graphite for the battery anode.  However, silicon anodes could offer as much as ten times more capacity as anodes made with graphite.  Unfortunately, silicon has a few downsides that make it unreliable as well as unaffordable.  BioSolar is working to overcome those downsides and make silicon anodes an affordable alternative by using a silicon alloy.

Biosolar is also working on the other important battery component  -  the cathode.  Existing lithium ion batteries are limited by the capacity of the cathode.  The company has developed a new cathode made from a conductive polymer that can withstand higher charge-discharge cycles.  This would extend the life of the lithium ion battery and lower the overall cost of operation.  In June 2017, the company filed an application for patent protection of its proprietary process and material for high capacity cathodes.

The company is not alone in the quest for a better lithium ion battery.  There are others experimenting with polymers and silicon-based materials for lithium ion energy storage.  For example, researchers at the University of Leeds in the United Kingdom, Lawrence Berkeley National Laboratory in California, Wuhan University of Technology in China, and Pacific Northwest National Laboratory in Washington are just four of several research and development groups publishing papers on their experiments with conductive polymers.  The activity could be a source of competition, support or distraction for BioSolar.  For example, the University of Leeds has licensed its technology to privately held Polystor Energy Corporation in the U.S., which planned to commercialize the Leeds polymer gel for use as the electrolyte in a lithium ion battery.  While Polystor would not have competed against BioSolar's anode or cathode materials, its progress or lack of progress could have an impact on investors' view of polymer technology in the energy storage sector.

BioSolar’s research and development efforts are led by its Chief Technology Officer, Dr. Stanley Levy.  With a dozen patents in his own name, Levy has been recognized by his peers for technical work on plastics and film development.  His prior experience includes stints at DuPont, Global Solar and Solar Integrated Technologies.

Besides the mechanical engineering background of Levy, BioSolar’s chief executive officer, David Lee, brings electrical engineering education and experience to team.  Lee founded BioSolar after working in various engineering positions at the electronics, space and defense units of TRW as well as management roles at RF-Link Technology, Inc. and Applied Reasoning, Inc.  A plus for BioSolar is Lee’s time in the trenches in marketing and sales, which will be needed to get the company’s technology turned into marketable products.

As a developmental stage company BioSolar has no revenue.  Its operations are limited to managing sponsored research activities.  BioSolar has received support for its research activities from the University of California at Santa Barbara.  For the rest of its work the company relies on cash resources to support its development plans.  Operating expenses have been near $600,000 per quarter.  One of the company’s most significant expenses is a research arrangement with North Carolina Agriculture and Technical State University, which is conducting tests on BioSolar’s polymer and silicon-alloy materials.  

With only $244,776 in its bank account at the end of September 2016, any investor considering a position in BSRC might take pause.   Since the close of the September quarter the company entered into an arrangement for an unsecured convertible promissory note for up to $500,000.    Nonetheless, expect more capital raising efforts involving dilutive securities of some kind or another.  There is really no other way to entice investors to an early stage company than to offer a piece of the pie.  The company has not yet found sponsorship by a large investor or strategic partner, so capital raising activities appear to be limited to individual investors.

For investors with no interest in a private placement, there are shares quoted on the Over-the-Counter market.   At a nickel, the shares are price like options on management’s ability to reach the development milestone before running out of money.  It is a high risk proposition, but one that could yield exceptional returns if BioSolar is successful in getting its materials into a working prototype battery and the market recognizes some value the accomplishment.

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.

February 16, 2017

Why We Can't Take Our Eyes Off Gevo

Jim Lane 

So, feel the bioeconomy backbeat and let the music flow. AY-YI YI-YA AAAY, Gevo (GEVO) just can’t stop dancin’.

(Whoops, that was Becky G‘s Can’t Stop Dancin’, not Gevo’s.)

But there’s something so cool in that technology that we can’t take our eyes off the company and its progress, even though looking at the balance sheet can feel like watching a car crash in slow motion. This week, Gevo executed a series of moves including signing up its first direct customer for hydrocarbons for the proposed expansion of its Luverne, Minnesota plant. The highlight was a five-year offtake agreement with Haltermann Carless, ETS Racing Fuels and EOS.

Let’s look into that.

In the first phase, HCS will purchase $2-$3 million worth of isooctane produced at Gevo’s demonstration hydrocarbons plant located in Silsbee, Texas. This first phase is expected to commence in 2017 and would continue until completion of Gevo’s future, large-scale commercial hydrocarbon plant, which is likely to be built at Gevo’s existing isobutanol production facility located in Luverne, Minnesota.

In the second phase, HCS will agree to purchase approximately 300,000 to 400,000 gallons of isooctane per year under a five-year offtake agreement. Gevo would supply this isooctane from its first large-scale commercial hydrocarbons facility, which is likely to be built at Gevo’s existing isobutanol production facility located in Luverne, Minnesota.

The LOI establishes a selling price that is expected to allow for an appropriate level of return on the capital required to build out Gevo’s existing production facility in Luverne, Minnesota.

What’s HCS up to? They’ll market and distribute Gevo’s products globally on a non-exclusive basis, and the intent of the two companies is to establish further offtake arrangements for other products such as Gevo’s alcohol-to-jet fuel, also known as ATJ, and its isobutanol.

Reaction from the principals

“Haltermann Carless and HCS will serve as a major and substantial offtaker of Gevo’s renewable isooctane from Gevo’s demonstration plant and a vital offtaker from Gevo’s first commercial hydrocarbon plant. Gevo and HCS agree to evaluate options to make the partnership most impactful and provide maximum credibility for Gevo’s next generation technology,” said Henrik Krüpper, Chief Sales Officer and member of the HCS Group GmbH’s Executive Committee.

“We are very pleased to establish this commercial relationship with HCS Holding, which is world renowned in the industry for the high quality of its performance fuels. We expect that they will be an important customer and partner for Gevo,” said Dr. Patrick Gruber, Gevo’s Chief Executive Officer.

“When we produce ATJ, we also produce other products such as isooctane and isooctene. We believe that a binding offtake agreement with HCS Holding is one more piece of the puzzle to validate our case for expanding the Luverne plant,” continued Dr. Gruber.

The Ritual Massacre of the Shareholders

And, there has also been the advanced bioeconomy’s annual ritual of the Reorganization of the Debt and the Massacre of the Shareholders.

These rituals are such a fixture nowadays at some of the most extravagantly interesting technology companies that you’d think there’d be a painting of the scene by Correggio hanging in the Louvre, adjacent to the Assumption of the Virgin.

Imagine: The frightened shareholders in the tumbrils, the sad but determined executive team with a hang-dog “well, we have to do something” look, the debt-holder looking like Calvin Coolidge saying “well, they hired the money, didn’t they?”, while somewhere in the background a thousand points of light representing flared natural gas in the Bakken dump wisps of CO2 into the heavens, and an Angel of the Lord weeps in heaven, holding a tablet inscribed “how renewable fuels could save the planet”.

Back to reality, Gevo raised $11.87 million in a 6.25 million share offering, and given that the company recently executed a 1-20 stock split, it’s like more than 120 million of the old shares suddenly flooded the market.

$1.78 million of the proceeds go immediately to Whitebox, a senior debt holder, and the company will be paying down another $8 million in debt between now and mid-June, which means that, at the end of the day, the entire share offering was essentially a means by which Gevo converted roughly $10 million in debt to equity, as it moves to reduce its current $28 million debt load with Whitebox and begin to assemble a balance sheet that supports expansion of the company’s Luverne plant to make ATJ renewable jet fuel and hydrocarbons for the likes of HCS.

The Gevo dilemma

Of course, the question that hangs over the enterprise is that — now that Gevo has developed a stable technology for making isobutanol and has proven it out at Luverne, and developed a demo-scale technology for making renewable hydrocarbons at its Silsbee, Texas plant — how is it going to finance a business plan? That is, finance the construction of an expanded plant that can make enough molecules at enough scale to a) make a difference in the world and b) rescue Gevo from the financial trough into which it has fallen.

Since money is unlikely to fall from the sky like manna from heaven, the likely solution is an offtaker who steps forward out of the desire for the product.

We suspect the inflection point might be renewable jet fuel.

After all, airlines have seen enough pressure on their sustainability goals from regulators, have seen enough shaking heads when it comes to the prospects for a solar plane any time in the next 50 years, and enough companies that can produce jet fuel decide to make renewable diesel. Airlines and the companies in their supply chain have figured out that there’s little hope that, on the numbers, anyone is going to be supplying jet fuel so long as the California Low Carbon Fuel Standard offers big support for diesel and nothing for jet.

And they have also calculated that the technology case for making $3 renewable jet fuel is pretty good right now, and it might be time to lock in some long-term supply contracts and some long-term feedstock contracts.

Yes, airlines are enjoying low fuel prices now, but someone has to ask how long the public will permit concentrated amounts of CO2 to be vented at 35,000 feet, where it can do some damage — without extracting a carbon fee for skyfill.

After all, everyone pays for landfill. Just try and dump some garbage without paying a municipal fee. Landfill fees didn’t arrive with the Garden of Eden — someone thought them up when the public got good and tired of free and open dumping.

When a carbon fee arrives for skyfill — and there’s no certainty of it but history argues that it will — those airlines that have access to renewable fuels will have such a built-in price advantage that it’s quite difficult to see how the other airlines will ever be able to afford new jets — which cause balance-sheet woes for very large enterprises, in their own right, enough to make the Reorganization of the Debt and the Massacre of the Shareholders a ritual that a lot of companies might want to send a representative to the Louvre one day to see.

Gevo’s sufferings might be a harbinger of the suffering meted out to a lot of companies who bet against the public appetite for making polluters pay, once they can really smell the garbage wafting across every nostril back in town.

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.

February 15, 2017

Bioplastics Maker Avantium's IPO Plans

Jim Lane

Here’s our 10-minute version of the filing, slightly re-organized to make sense to Earthlings instead of aliens from the Planet Prospectus.

In the Netherlands, bioplastics maker Avantium is planning an initial public offering and listing of all shares on Euronext Amsterdam and Euronext Brussels. The company expects to raise up to €100 million (USD$106 million) and complete the offering by the end of the current quarter. More than half of the offering has already been secured via commitments from cornerstone investors.

Avantium’s YXY technology converts plant-based sugar into chemicals and plastics, including 2,5-furandicarboxylic acid, a precursor to the promising bioplastic polyethylene furanoate. Approximately €65–€75 million of the proceeds will be used to help fund the company’s first world-scale plant, a 50,000 tons per year FDCA production unit planned for Antwerp as part of a joint venture with BASF. The rest of the funds will be used to build pilot plants for the company’s Zambezi and Mekong renewable chemicals projects, as well general corporate purposes.

“With the commercialization of the YXY technology and other projects entering the pilot plant stage, access to equity capital markets will be the most logical step to effectively support our strategy and our ambitious plans for growth,” says Tom van Aken, Avantium CEO. “We look forward to the opportunities a public listing can bring.”

We Plan to Raise Gobs of Money

From the Filing: “Avantium aims to raise up to €100 million in gross proceeds from the Offering to support the YXY technology business and the other renewable chemistries projects.

The Company anticipates to use €65-75 million of the net proceeds of the Offering for the funding of the Joint Venture, enabling it to construct and operate the reference plant for the commercialization of the YXY technology.

Our Big Bright Green YXY Machine

From the Filing: “Avantium develops ground-breaking proprietary chemical technologies and production processes to convert biobased feedstock into high-performing, cost-competitive and sustainable products.”

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

I want to say one word to you. Just one word. Are you listening? Plastics.

From the Filing: “Significant market opportunity driven by increasing demand for renewable chemicals used as building blocks for materials such as plastic bottles for beverages, films for food packaging and electronics, catalyzed for textiles, coatings and engineering plastics.”

With 311 million tons produced in 2014, plastics are essential materials in people’s everyday lives. This number is expected to double in the next 20 years and increase to approximately 1 billion tons by 2050. Rapidly increasing consumption, together with climate change concerns and the increasing demand for renewable, sustainable products and a circular economy, puts pressure on the use of fossil resources. Avantium’s market opportunity is driven by the increasing demand for renewable chemicals and materials, and increasing consciousness around the sustainability of products and production methods.

“The demand for renewable and sustainable materials is developing fast. Avantium is a pioneer in the area of renewable chemistry with a proven track record of developing advanced chemical catalyzed production processes. Since 2006, Avantium has been a leader in the development of novel chemical catalytic processes for the production of FDCA and PEF, derived from biomass feedstock. PEF is strongly positioned to become the next generation packaging material, based on its unique set of properties. It is a 100% biobased, 100% recyclable plastic with superior performance properties, making PEF an attractive alternative to PET and other packaging materials such as aluminum, glass and cartons.

We’re Not a One-Trick Pony

From the Filing: “Avantium has a leading position in providing advanced catalysis R&D services & systems to companies in the oil, gas, chemical and renewable industry, while simultaneously commercializing the YXY technology for making biobased chemicals and bioplastics.

“Besides the YXY technology which is deployed in the Joint Venture, two other projects have reached or are entering pilot plant stage – project Mekong and project Zambezi. Project Mekong is a one- step process for the production of MEG from glucose. Biobased MEG is chemically identical to fossil- based MEG. Today’s market for MEG is predominantly fossil-based and represents an annual turnover of over US$25 billion. Project Zambezi is a cost-effective process for the production of high-purity glucose from non-food biomass that can be converted into biobased chemicals. Avantium intends to start the construction of dedicated pilot plants for these projects in the next two years. Avantium’s project Volta comprises the direct use of electricity in chemical processes to convert CO2 into sustainable chemical building blocks. Avantium is working on electrochemistry since 2013. To further enhance the technology, Avantium acquired all assets and patents of Liquid Light in December 2016. Liquid Light’s assets have been transferred to Amsterdam, and are currently being integrated in Avantium’s laboratories.”

We Are the World

From the Filing: “Avantium has formed business collaborations with over 20 partners, including The Coca-Cola Company, the world’s leading manufacturer, marketer and distributor of non-alcoholic drink concentrates and syrups with more than 500 brands globally; Danone, a leading global food company; ALPLA, one of the world’s leading companies in the packaging solutions sector; and Mitsui, one of the largest international companies in Japan. The Joint Venture will continue the activities initiated by Avantium with Toyobo, one of Japan’s top producers of fibers and textiles, to cooperate in boosting PEF polymerization for a range of uses.”

We Have Offtake A-Go-Go

From the Filing: “Able to attract renowned global partners throughout the entire value chain, such as The Coca- Cola Company, Danone, Toyobo, ALPLA and Mitsui.”

From the Department of You Won’t Be Left Hanging

From the Filing: “Avantium has obtained significant commitments from reputable cornerstone investors, which also includes a number of existing shareholders and convertible bondholders; as a result, more than half of the Offering has been secured, assuming €100 million gross proceeds from the Offering…Provided there is sufficient demand, it is intended to allocate at least 10% of the shares to retail investors in the Netherlands and Belgium.”

The First Commercial: Thunderbirds are Go!

From the Filing: “Synvina, the joint venture with BASF, established on 30 November 2016 (the “Joint Venture”), intends to commercialize the YXY technology and build the first commercial scale FDCA (2,5- furandicarboxylic acid) reference plant in Antwerp with capacity of up to 50,000 tons per annum, to enable a global market pull for biobased materials from industry leaders.”

“The Joint Venture intends to build and operate the first commercial reference plant for the production of FDCA, the key building block for producing polyesters, such as polyethylene- furanoate (PEF), a 100% biobased and fully recyclable plastic. PEF has improved barrier properties for gasses like carbon dioxide and oxygen, leading to longer shelf life of packaged products. It also offers a higher mechanical strength, thus thinner PEF packaging can be produced and fewer resources are required. The end markets for packaging materials made of PEF represent an aggregate annual turnover of over US$200 billion.

We’ll Spending Your Money Making Stuff, not on Making Technology that Will Make Stuff Someday

From the Filing: “The remainder of the proceeds of the Offering will be used to build pilot plants for the two most advanced development projects in the renewable chemistries business (project Zambezi and project Mekong) and to operate these plants up to commercial stage, for other projects in renewable chemistries and for general corporate purposes in line with the Company’s business and strategy.”

We Get Along so Well, we could give lessons to the Trump Administration

From the Filing: “Proven 16-year track record in providing advanced R&D services and systems to a strong base of global blue-chip customers in the chemical, refinery and energy sector. Led by a committed, entrepreneurial and strong management team combining deep sector knowledge and industry experience. Avantium is led by Tom van Aken (Chief Executive Officer) and Frank Roerink (Chief Financial Officer). Van Aken joined Avantium in 2002 as Vice-President of Business Development and became Chief Executive Officer in 2005. He has led the company through the transition to become a focused chemical and cleantech company by divesting its pharmaceutical business and by the development of the YXY technology. Prior to joining Avantium, Van Aken held various commercial positions at DSM, primarily in DSM’s fine chemicals and life sciences business in the United States and the Netherlands. Roerink has been CFO at Avantium since 2007. Prior to that he held several positions at Unilever for over thirteen years. Lastly as Director of Mergers & Acquisitions for Unilever, prior to that he was Finance Director at Unilever Bestfoods in the United States. The Executive Board is supported by the Management Team members, Gert-Jan Gruter (Chief Technology Officer), Steven Olivier (Managing Director Catalysis) and Carmen Portocarero (General Counsel).

Yep, We Use Protection

From the Filing: “The Catalysis technology is protected by a portfolio of 19 patent families. Avantium has extensive experience and expertise in the high tech field of catalysis R&D, which generates a high level of repeat customers and the stability and profitability of its Catalysis business. As a first mover, Avantium has been able to build a strong and extensive IP portfolio: the YXY technology is currently protected by 38 active patent families covering each step of the production processes of FDCA, PEF and selected PEF applications in bottles, fiber and film.

We’ll get this done next month, or my name’s Vinod Khosla

From the Filing: “The Offering is envisaged to take place before the end of the first quarter of 2017, subject to market conditions. If and when the Offering is launched, further details will be included in the prospectus.”

The Bottom Line

It’s been nearly 4 years since the BioAmber IPO closed out a wave of industrial biotech initial listings — we’ve had some smaller flotations since then, but nothing like €100M since the days of Solazyme (SZYM) and Amyris (AMRS), in this space. Will the window open and at a good price. Stand by — but if offtake, well-financed commercial partners for a JV, share-buying commitments from partners and a hot technology making an uber-hot product set count for much with investors, this IPO ought to sail through. Stand by.

The Digest has one of those Multi-Slide Guides

Yep, we have the skinny on Avantium, here.


Additional reporting by Rebecca Coons, based on an earlier report that appeared in Nuu.

Jim Lane is editor 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.

The Republican-Proposed Carbon Tax

by Noah Kaufman

A group of prominent conservative Republicans—including former Secretary of State James Baker III, former Treasury Secretary Hank Paulson, former Secretary of State George Shultz and former Walmart Chairman Rob Walton—met with key members of the Trump administration on Wednesday about their proposal to tax carbon dioxide emissions and return the proceeds to the American people. Such an economy-wide tax on carbon dioxide could enable the United States to achieve its international emissions targets with better economic outcomes than under a purely regulatory approach.

Attributes of the Republican Carbon Tax Proposal

While the details on the plan from the newly formed Carbon Leadership Coalition (CLC) are considerably less specific than a legislative proposal, this is a well-thought-out and ambitious plan that makes a good-faith effort at addressing many of the difficult choices on the path to enacting a carbon tax. Consider the following attributes:

  • Significantly reduces emissions. The group proposes a tax that would start at $40 per ton of carbon dioxide emissions from fossil fuels and increase over time. A paper released by CLC provides a useful summary of recent modeling efforts on the effects of a carbon tax on emissions. It concludes that the CLC proposal (including the effects of rolling back some regulations) would reduce greenhouse gas emissions roughly 28 percent below 2005 levels by 2025, the upper end of the United States’ commitment under the Paris Agreement on climate change. It also implicitly recognizes concerns of the environmental community by calling for a rate that is high enough to provide greater emissions reductions than regulations already in place. WRI research shows that models tend to underestimate the emissions reductions from a carbon tax, so it seems likely that the United States would achieve its 2025 emissions target under this proposal.

  • Benefits for poor and middle classes. As WRI research has shown, a carbon tax’s effects on household finances are most heavily dependent on how the revenue is used. According to the CLC proposal, all tax proceeds would be returned to the American people on an equal basis via quarterly dividend checks. CLC chose this approach because of its transparency and because the longevity of the policy would be “secured by the popularity of dividends.” In addition, this tax-and-dividend approach would be highly beneficial to poor and middle-class households, who would receive far more in dividends than they would spend on the tax. (Of course, these households—and all households—would also benefit from cleaner air and reduced risks of climate change.) High-income households, on the other hand, would be better off if the revenue were used in other ways, such as to lower other taxes.

  • Addresses concerns about U.S. competitiveness and international action. A core pillar of the CLC proposal is a “border carbon adjustment.” Exports to countries without comparable policies would receive rebates for carbon taxes paid, while imports from such countries would face fees contingent on the carbon content of their products. The border carbon adjustment would protect the competitiveness of energy-intensive companies and those that are subject to foreign competition. It would also encourage all U.S. trading partners to adopt similarly stringent policies, which is necessary to achieve meaningful global progress on climate change.

  • Cost-effectively reduces emissions. As economists will tell you, putting a price on emissions is the most cost-effective way to reduce them because it encourages producers and consumers to seek out the lowest-cost opportunities to reduce their emissions. Economic models show that for decarbonizing the U.S. economy, economic outcomes are far better with a carbon tax as the centerpiece of policy efforts as compared to a strictly regulatory approach.

  • Offers potential for bipartisan support. Transforming to a low-carbon economy is an objective that Democrats widely support, but it will require new and comprehensive legislation that attracts Republican support as well. Prominent Republicans are supportive of the CLC proposal because it embraces both free markets and limited government with its plan to eliminate regulations that are no longer necessary with the existence of the carbon tax (“Less Government, Less Pollution,” as CLC puts it).

More Details Eventually Needed

The CLC proposal will need to gain support from policymakers currently in office for it to become proposed legislation. If it does, important details will need to be filled in. Examples include:

  • Details of the regulatory reform. The CLC plan involves replacing much of EPA’s regulatory authority over carbon dioxide emissions. Environmental groups are likely to push for mechanisms to ensure that the emissions reductions needed to meet climate goals are sufficiently certain; the Environmental Defense Fund recently described options for combining such “Environmental Integrity Mechanisms” with a carbon tax. In addition, the policy should avoid eliminating regulations that are not duplicative with a carbon tax. For example, WRI research has explained why supporting the research, development and deployment of the next generation of low-carbon technologies will lead to more cost-effective decarbonization in the long-run.

  • Support for coal communities. While the near-term effects of a carbon tax on the vast majority of American households and businesses would be small, communities of coal industry workers (and others whose livelihoods are tied to a high-carbon economy) are already struggling. In order to avoid making the situation worse, certain policy measures must be in place to help rebuild these economies. Whether by allocating tax revenues to economic development in these communities (just a small sliver of the tax revenue could provide enormous help) or though separate legislation, support for workers in the fossil fuel industry should be a key consideration in designing our country’s decarbonization strategy.

There is strong support for carbon taxes among the American public and in the business community, including more than two-thirds of all Americans and more than half of Republicans. Nearly 40 countries and more than 20 sub-national jurisdictions are now pricing carbon.

Despite this support, political gridlock and the powerful corporate opposition have obstructed policy action at the U.S. federal level. Overcoming these entrenched interests will require courageous politicians. This proposal deserves serious attention from the Trump administration and policymakers on both sides of the aisle.

Noah Kaufman is an economist for the U.S. Climate Initiative  at the World Resources Institute.  The focus of his work is on carbon pricing and other market-based climate change solutions.

February 08, 2017

What Good Is Shareholder Advocacy?

By Marc Gunther. 

Last week, ExxonMobil added Susan Avery, a physicist, atmospheric scientist and former president of the Woods Hole Oceanographic Institutions, to its board of directors.

Shareholder advocates, led by the Interfaith Center on Corporate Responsibility (ICCR), which has been organizing shareholder campaigns at ExxonMobil for nearly two decades — yes, two decades — welcomed the appointment.

Tim Smith, the director of environmental, social and governance (ESG) shareowner engagement at Walden Asset Management, said in a news release: “This action by the board is encouraging for shareowners and we want to commend Exxon for this prudent and forward-looking decision.”

For shareholder advocates — investors who represent public pension funds, socially-responsible money managers, unions and church groups, and exercise their rights as owners to try to influence corporate behavior — this is about as good as it gets. ICCR and its allies have for three years called on ExxonMobil to elect an independent director with climate change expertise. They’ve won.

But will the planet notice? Of course not. No new director, not even a climate scientist –and there’s a difference between being a scientist and an advocate — will persuade the board or top executives of ExxonMobil to turn a company that says it is “committed to being the world’s premier petroleum and petrochemical company” into, say, a wind or solar firm. In a long profile of ExxonMobil published just this week, Steve LeVine of Quartz concluded: “Exxon is, and will long continue to be, foremost an oil company.”

Shareholder advocates will continue to push ExxonMobil, and the company will continue to do what it chooses to do, a dynamic that underscores the problem with shareholder advocacy: It’s all about persuasion. Those hundreds of shareholder resolutions that are filed every year with big companies? They are all precatory — a fancy legal term that means expressing a wish or request — and so corporate managers are free to ignore them, and often do, even in the exceedingly rare cases which a majority of shareholders vote for a resolution.

I say this not to disparage shareholder advocates. I’ve long admired such titans of the shareholder advocacy movement as Robert A.G. Monks (who I profiled in 2002 for FORTUNE) and Nell Minow, as well as Tim Smith, who led ICCR for many years, and their allies at nonprofit As You Sow, . But in these times, it’s important for social-justice advocates, nonprofit groups and those who fund them to take a hard-headed look at their strategies, to see what’s working and what is not. As Kevin Starr, who heads up the Mulago Foundation, argued recently:

That means that you get absolutely clear on what you’re setting out to accomplish, identify the outcome(s) that would signify impact, connect the dots from your work to all the way to impact, and strip away all the stuff that doesn’t get you there. You measure what’s critical to delivery, behavior change, and eventual impact, and you continually iterate based on what you measure.

How many social-justice advocates, nonprofits and foundations do this? Not enough, I’m certain. Which brings us back to shareholder advocacy.

It’s hard to measure the impact of shareholder advocacy, or any advocacy, for that matter. Often, shareholder advocates work on issues that also attract attention from politicians, regulators, activist groups, business-friendly NGOS, corporate social-responsibility insiders and consumers. When change happens, it’s hard to tease out cause and effect.

Some notable achievements

That said, shareholder advocates have notched some notable achievements. In the 2000s, first at Dell, later at Apple, and eventually through much of the computer industry, they persuaded companies to take back and recycle electronics. According to The Shareholder Action Guide, a new book from Andrew Behar of As You Sow, the group wangled a meeting in 2007 with Steve Jobs, then Apple’s CEO. Jobs was, no surprise, caustic and negative at first, but he eventually conceded that Apple did not want to be seen as an environmental laggard. Not long after, Apple announced a broad set of environmental commitments known as “A Greener Apple.” Score one for engaged owners.

More recently, Natasha Lamb, who leads shareholder engagement at Arjuna Capital, a sustainable investing firm, led a series of successful engagements with technology companies, including Apple, Intel, Amazon, Expedia, and eBay, around the issue of gender pay equity. All have promised to close the gap between what they pay men and what they pay women. This year, Arjuna will take the campaign to finance and consumer products firms. “There’s a critical mass of companies that are doing it, and the other companies see the writing on the wall,” Lamb told me.

Such victories have led As You Sow’s Behar to declare, with some exuberance:

We believe that most of the world’s environmental and human rights issues can be resolved by increased corporate responsibility and that shareholders are the single most powerful force for creating positive, lasting change in corporate behavior.

Say what? Shareholders are “the single most powerful force” for changing companies? More powerful that governments, activists, consumers and workers? Forgive me, but I’m skeptical.

Having paid on-and-off attention to shareholder advocates for years, my impression — and yes, it’s an impression, not a peer-reviewed study — is that they have been stymied more often than not. For much of the mid-2000s, for example, shareholder advocates pushed Coca-Cola and PepsiCo to use more recycled content in their plastic bottles. They got some tepid commitments, but as oil prices fell, so did the interest in using recycled instead of cheaper virgin plastic. US recycling rates have been flat for years. Shareholder persuasion can’t overturn economics.

On the issue of CEO pay–long the No. 1 agenda item for many shareholder advocates–there has been scant progress. Just the opposite, in fact: The left-leaning Economic Policy Institute reported last year that from 1978 to 2015, “inflation-adjusted compensation of the top CEOs increased 940.9 percent, a rise 73 percent greater than stock market growth and substantially greater than the painfully slow 10.3 percent growth in a typical worker’s annual compensation over the same period.”

Nell Minow, who has worked on corporate governance issues since the 1990s, says: “Every effort to contain CEO pay has been (throwing) gasoline on the fire.”

Making the business case

There’s a pattern here, as Arjuna’s Natasha Lamb explained:

Shareholder engagement works when the change requested by the investor is in the company’s self- interest. In the absence of that, if it’s only about the right thing to do, that’s not enough. It’s got to be the smart thing to do. There’s got to be a business case.

To be more specific, there’s got to be a business case that appeals to corporate managers, who have an annoying but predictable tendency to pursue their own self-interest, even when it conflicts with the long-term interests of the company. This is key. You may be able to make a very good business case for curbing CEO pay, but try making it to a CEO. He or she is unlikely to be persuaded.

So what are the chances that shareholder advocacy can move the needle on the all-important issue of climate change? The advocates argue that climate change creates risks to oil companies like Exxon or Chevron, citing global efforts to curb carbon emissions. Says Lamb: “If a cap is put on the amount of carbon we can burn as a planet, and they can’t sell two-thirds of their assets, that’s a detrimental risk to their business.” This is a legitimate worry for long-term investors, particularly pension funds such as CalPERS or CalSTRS that are investing today on behalf of workers who will be collecting pensions a half century from now.

The trouble is, the executives who run ExxonMobil or Chevron don’t operate with a 50-year time horizon, even though they invest capital in oil and gas infrastructure that may be around for nearly that long. They’re thinking about the next five to 10 years, for obvious reasons. (The average tenure of a FORTUNE 500 CEO is about five years.) Boards don’t seem to be any better. And while Shell, Total and Statoil have all invested in renewable energy, they are driven by near-term market opportunity, not shareholder pressure. Short-term thinking may be the biggest obstacle to effective shareholder advocacy.

The other obstacle is that the world’s biggest institutional investors vote no or abstain on the vast majority of the environmental, social and governance resolutions filed by the shareholder advocates. BlackRock, Vanguard, Fidelity all support management, and not the advocates, just about all the time.

This may come has a surprise because Larry Fink, the CEO of BlackRock, which the world’s largest asset manager, loves to pontificate about corporate sustainability and long-term thinking. What’s more, in a recent report, the BlackRock Institute recommended that “all investors should incorporate climate change awareness into their investment processes.” Yet, as The Times recently reported, Block Rock “voted against every shareholder proposal relating to diversity, environment, governance and social concerns over the last year, according to Proxy Insight.” Every single one.

Resolutions about resolutions

Shareholder advocates have taken notice, so they are now filing resolutions at Black Rock (as well as at other big asset managers) that accuse BlackRock of putting its reputation at risk because of its “perplexing and troubling” votes on environmental and social issues, as the Financial Times reported.

Resolutions about resolutions, in other words. It brings to mind a cat chasing its own tail.

[BlackRock’s behavior is perplexing only if you overlook the fact that big-company CEOs are among its big customers. BlackRock manages corporate pension funds and 401-K plans. When there’s business to be done, why annoy a customer or potential customer over a trivial matter like global warming?]

In fairness, the new set of shareholder resolutions at asset managers won’t do any harm, and they could do good. If BlackRock worries about its reputation, it may begin to align its proxy voting with its sustainability rhetoric. And then, the fossil fuel companies may pay more attention to shareholder resolutions. And then? Well, I’m not sure what is supposed to happen after that.

Someday we’ll find out, I suppose. It could be a long wait.

Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

February 07, 2017

The Trump Trade

by Garvin Jabusch

The first two weeks under the Trump administration have been a shock to the system. With the change in administration, how will you approach your stock portfolio(s)?

For starters, your fundamentals should remain unchanged. For me, that means looking for great companies in expanding markets that are enabling long-term economic growth, and reducing systemic risks. Of course, this also means buying these stocks at low valuations. Benjamin Graham and Warren Buffett were right about ‘wonderful companies at fair prices.’ That is never going to change.

With that said, let’s look at what has changed and what to do about it.

Unpredictability -- that’s the first quality worth noting about the new White House team’s leadership style. Trump’s comments and actions concerning topics such as open global trade, immigration and the US-China relationship will cause uncertainty, to which markets usually do not respond well. George Soros recently emphasized this point, adding, “Uncertainty is at a peak, and actually uncertainty is the enemy of long-term investment. I don’t think the markets are going to do very well.” 

It is true that in the short time since Trump’s election, markets have rallied. Traders perceive that uncertainty has actually decreased because the election cycle is over, and they believe a Trump administration will benefit business by removing regulations. The possibility of fiscal stimulus via infrastructure -- something a Republican Congress never let Obama do -- has also rallied markets. But as we witnessed on 1/30 and will likely continue to see, uncertainty's retreat will prove to be an illusion. 

For example, markets have largely appeared to accept the positive business aspects of Trump’s rhetoric but equally, so far, to discount the negatives, such as the possibility of a trade war. Trump also promises to roll back financial oversight and regulations such as Dodd-Frank, which raises the specter of possible asset-bubble deflation, a la 2008. Good markets should not be confused with a stable investing environment.

Beyond Soros, other qualified observers, such as Eliot A. Cohen and Ruth Ben-Ghiat have noted that there is enough personal and political capriciousness swirling within this White House that the consequences could extend far beyond market implications. We should not make the mistake of not taking seriously the administration’s actions over its first two weeks.

So, portfolio defensiveness is clearly warranted. What that means for an individual investor’s portfolio, I leave to your best judgement.

Yet the inevitable market volatility will present opportunity, both in buying oversold securities as opportunities arise, and also in making investments that benefit from volatility itself.

Trump’s worldview often contradicts global momentum, and this can present buying opportunities. Energy policy is a prime example of this. The global transition away from fossil fuels toward renewable energies is now clearly underway. Nevertheless, the Trump administration's attempts to prolong the fossil age a few more years may meet with some success. It is possible that gas and oil may be about to enter their last, large bull run. If this is the case, some investors may see this as a short-term opportunity, before the much bigger opportunity in being short fossil fuels indefinitely (or until it’s time to cover). For those looking to grow their portfolios beyond the next couple of years, a much larger opportunity appears -- companies that are trailblazing toward the interconnected, sustainable economy.

Trump’s actions also spell out the need for diversification in light of U.S. political risk. While Trump has removed all references to climate change from whitehouse.gov, approved the Keystone XL and DAPL pipelines, canceled all EPA grants, and caused the CDC to cancel its climate change and health conference, he can’t stop the global momentum of renewable energy (worth a post on its own -- stay tuned).

So, how does an investor respond? As a fund manager, this looks objectively to me like any other case of political risk in a given country, underscoring the importance of a diversified portfolio. Saudi Arabia has policies against beer? Vatican City has ethical restrictions on imports of contraceptive devices? Maybe place less weight on companies trying to sell those products into those markets. Obviously, these examples are extreme to the point of absurdity, but they illustrate my point about political risks and diversification, because both beer and condoms have huge markets in other geographical areas that can be exploited for investment return. My examples are also less than apt in that there is today a booming market in the U.S. for both wind and solar but, considering both the words and actions of Trump and his administration, it seems only prudent to capitalize on renewable energies’ opportunities in companies with large global distribution networks and thus are not overly reliant on U.S. distribution. Canadian Solar (CSIQ), Vestas Wind Systems (VWDRY), and JinkoSolar (JKS) come to mind. Renewable energies worldwide are booming, and if the U.S. chooses not to participate fully in these industries, at least our portfolios can.

There may be opportunities in renewable infrastructure under Trump’s watch, as he pushes to develop transmission capacity from windy middle America to the coasts.

We are now, as much as at any time in recent memory, embarking upon an uncertain landscape, both culturally and economically. More than ever, investing requires a long view into how the economy is most likely to evolve, regardless of short- and medium-term gyrations, wild and scary as those may become.

In short, that means figuring out what’s next. What’s next in energy? In tech? In consumer goods? The way to earn returns over the long term entails investing in firms that are leading the way to the future, holding and accumulating shares through volatility, and looking for value.

Note: A version of this post appeared previously on Worth.com.

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

February 06, 2017

Broadwind Catches a Breeze

by Debra Fiakas CFA

Two weeks ago wind tower builder Broadwind Energy (BWEN:  Nasdaq) announced $28 million in new orders.  Plans are to deliver all the towers within the year, giving a nice boost to the top-line for a company that recorded $170.3 million in sales over the last reported twelve months, well below the same period the year before.  In addition to wind towers, the company produces gearing mechanisms used in the oil, gas and mining industries.  Unfortunately, demand from these customers has been weak in recent periods.

The company has had some difficulty in establishing a profitable business model.  Losses for Broadwind have been epic in size and by the end of the last full fiscal year 2015, the retained deficit had ballooned to $308.8 million.  However, the last two reported quarters carried a glimmer of hope for the company as both ended solidly in the black.  The two analysts who have published estimates for Broadwind expect the company to reach $184.7 million or $196.7 million in total sales (an average of $190.7 million) in the current fiscal year.  They are also expecting a profit, at least in terms of cash earnings, of $0.12 per share.

Broadwind has survived its many years by generating positive operating cash flows even when reported earnings were negative.  In the twelve months ending September 2016, the company converted 14.8% of sales to operating cash flow.  Performance could get even better going forward.  The company has a cost reduction strategy in place that is still expected to realize new efficiency in continuing operations.
The decision to jettison the unprofitable Services segment is also an important step toward a healthy business model.  Most of the assets related to the Services segment have already been sold by the end of 2015, but $513,000 still needs to be mopped up.  What remains of the Services segment resulted in a net loss of $908,000 in the first nine months of 2016.  

Broadwind remains a small company with many challenges in its markets, but the company has made considerable progress toward becoming a growing and profitable business.  The oil and gas industry has come through a difficult period.  With a change in political thinking in Washington DC, the tight and squeaky shoe may now be on the foot of renewable energy. 

Wind energy has made great strides over the past couple of years.  By the end of September 2016, there was 75,700 megawatts of wind power generating capacity installed in the U.S.  Wind now represents 4.7% of the total electricity generating capacity in the U.S.

It is not likely that even the myopic views on the environment and climate issues held by the Trump administration can reduce the installed presence.  However, new projects could be in jeopardy if capital flows dry up as investors shy away from sectors that seem out of favor in the Oval Office.  Thus even though Broadwind just got a boost in new orders for wind towers, investors should temper expectations.

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.

February 04, 2017

What Happened To Solar In 2016, And What To Expect In 2017

by Shawn Kravetz, Esplanade Capital

What happened to solar industry fundamentals in 2016?

  • Global demand shattered records growing ~40% to ~80 GW
    • The U.S. grew ~75% to ~14 GW with solar accounting for 40-50% of new generation capacity in 2016 (vs. close to 0% in 2004 when Esplanade started investing in solar.)
    • China installed 34 GW, a massive but volatile figure with record H1 installations giving way to an air pocket in the third quarter followed by a fourth quarter rebound
  • Solar now competes against natural gas, coal, and other wholesale electricity sources not just in the US but throughout the world
    • Bloomberg New Energy Finance estimates that utility scale solar produceselectricity at ~$45/MWh with no fuel price risk versus coal at $50-$90/MWh
    • Major global corporations such as Apple, Google, Amazon, and Wynn Resorts are shifting almost entirely to renewable sources to power their energy-intensive businesses

Why did solar indices get halved in light of record demand?

  • The extension of the US solar investment tax credit late in 2015 ignited a sharp but short-livedDecember rally thereby starting 2016 at elevated levels
  • In April 2016, former industry darling SunEdison filed for bankruptcy casting a cloud over the sector including buyers of solar project assets
  • In June 2016, Tesla bid to acquire sister-company SolarCity in what many, including Esplanade, believed a bailout of another financially stressed former industry bellwether
  • Record demand catalyzed outsized midstream capacity expansions ensuring oversupply and supply chain price collapse in H2 16 as Chinese demand waned
  • Trump’s victory further torpedoed the sector at the end of 2016 as his campaign pronouncements against renewable energy injected further uncertainty into investors sentiment
  • Various policy and macroeconomic factors – most notably rising interest rates - also nipped at benchmark performance as well

What do we foresee in 2017 (big picture)?

  • Our intelligence suggests that Trump very likely ignores renewables (at least at theoutset) and certainly has not aired any plans to dismantle an industry that employs more than coal
    • While Trump presents medium-term risks to the status quo, we do not expect any meaningful changes in the near-term
    • In fact, the new administration has already publicly confirmed their preference to maintain current federal renewable policies
  • Globally, we expect front-end loaded demand in 2017 with perhaps the first annual decline in Esplanade’s history due to:
    • Chinese demand potentially exceeding record H1 2016 levels but likely to collapse after the June 30, 2017 subsidy step-down
    • US demand likely declining as utility scale procurement cycle resets after record 2016 installations
    • India emerging as the newest mega-market but only partially offsetting China and US headwinds
    • Japan’s gradual decline mitigated by emerging market growth
  • Like demand, we expect value chain pricing to remain relatively stable (and possibly up) in H1 2017 but face pressure in H2 as China demand wanes
  • Continued escalation in interest rates could factor slightly on 2017, but we estimate that current rates neither create nor destroy demand given that most solar debt is benchmarked to LIBOR not Treasuries
  • LIBOR has already increased 100-150 basis points since January 2014 while solar installations continued to break records in 2014-16 despite higher borrowing costs.
Shawn Kravetz is President and Chief Investment Officer of Esplanade Capital LLC, an investment management company he founded in 1999.  The firm manages private investment partnerships including Esplanade Capital Electron Partners LP, launched in 2009, which intends to be the world’s premier private investment fund dedicated to public securities in solar energy and those sectors impacted by its emergence.. 

February 02, 2017

Ten Clean Energy Stocks For 2017: January Jump

Tom Konrad Ph.D., CFA

The year got off to a spectacular start for my tenth annual Ten Clean Energy Stocks model portfolio. (You can read about the performance in 2016 and prior years here.)  The portfolio and its income and growth subportfolios were up 9%, 8%, and 14%, respectively.  Clean energy stocks in general also did well, with my three respective benchmarks up 2 to 3% each.  (I use the YieldCo ETF YLCO as a benchmark for the income stocks, the Clean Energy ETF PBW as a benchmark for the growth stocks, and an 80/20 blend of the two as a benchmark for the whole portfolio.)  The Green Global Equity Income Portfolio (GGEIP), an income and green focused strategy I manage returned 5%.

Detailed performance is shown in the chart below:

10 for 17 jan total return

I attribute the impressive January numbers to several factors.
  1. Despite anti-climate rhetoric, renewable energy has reached a tipping point, and investors are beginning to realize that (as I said in a recent interview on CNBC Asia) the Trump Administration will be less of a headwind for clean energy than a reduced tailwind.
  2. A rebound from December tax-loss selling (SSW-PRG and ASPN).
  3. Expected good new materializing (ABY)
  4. Unexpected good news (NEP).
I'll look into these faqctors in detail in the individual stock discussion below.

Stock discussion

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

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/16 Price: $18.99.  Annual Dividend: $1.63 (8.6%). Expected 2017 dividend: $1.64 to $1.67.  Low Target: $18.  High Target: $30. 
1/31/17 Price: $19.74.  YTD Dividend: $0.  Annualized Dividend: $1.63.  YTD Total Return: 3.9%

Pattern is a Yieldco owning mostly wind projects in North America.  With little news in January, the stock advanced along with other Yieldcos recovering from a Trump-inspired sell off.

8point3 Energy Partners (NASD:CAFD)
12/31/16 Price: $12.98.  Annual Dividend: $1.00 (7.7%). Expected 2017 dividend: $1.00 to $1.05.  Low Target: $10.  High Target: $20.
1/31/17 Price: $13.54.  YTD Dividend: $0.  Annualized Dividend: $1.00.  YTD Total Return: 4.3%

Solar-only Yieldco 8point3 reported fourth quarter earnings on January 26th.  Although the company upped their guidance and distribution, analysts were not thrilled.  The YieldCo is considering refinancing some of its company level, interest-only debt using project-level amortizing debt.  In terms of safety of the stock, this is a good move because it eliminates refinancing risk.  However, amortizing debt requires payment of both interest and principal, which will reduce cash available for distribution. 

The concern is that this might lead to a future dividend cut, unless the company can continue to grow enough to offset the future principal payments.  Management thinks it can, since they issued guidance for 12% distribution growth in 2017.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI)

12/31/16 Price: $18.99.  Annual Dividend: $1.32 (7.0%).  Expected 2017 dividend: $1.34 to $1.36.  Low Target: $15.  High Target: $30. 
1/31/17 Price: $18.28.  YTD Dividend: $0.  Annualized Dividend: $1.32.  YTD Total Return: -3.7%

Real Estate Investment Trust and investment bank specializing in financing sustainable infrastructure Hannon Armstrong drifted lower despite a lack of news.  I continue to consider it very attractive at this level.

NRG Yield, A shares (NYSE:NYLD/A)
12/31/16 Price: $15.36.  Annual Dividend: $1.00 (6.5%). 
Expected 2017 dividend: $1.00 to $1.10.  Low Target: $12.  High Target: $25. 
1/31/17 Price: $16.25.  YTD Dividend: $0.  Annualized Dividend: $1.00.  YTD Total Return: 5.8%

NRG Yield (NYLD and NYLD/A) drifted higher along with other YieldCos on a lack of significant news.  Two activist investors have revealed a stake in NRG Yield's parent, NRG Energy (NRG).  While they will be pushing for changes at NRG, I don't expect any significant changes at NRG Yield until its stock price recovers to the point where it again has the ability to raise equity without diluting existing shareholders.

Atlantica Yield, PLC (NASD:ABY)
12/31/16 Price: $19.35.  Annual Dividend: $0.65 (3.4%). Expected 2017 dividend: $0.65 to $1.45. Low Target: $10.  High Target: $30.
1/31/17 Price: $21.40.  YTD Dividend: $0.  Annualized Dividend: $0.65.  YTD Total Return: 10.6%
Althoughthe news feeds have been silent on the subject, I tweeted some big news at Atlantica Yield on January 13th:
Breaking: $ABY Atlantica Yield receives forbearance from DoE. Should allow annual dividend increase to at least $1.15. Bought @ $19.70
The news came from a 6-K filing with the SEC.  The forbearance means that funds which had been previously trapped at Alanitca's Mojave and Solana project subsidiaries can now be used at the company level to pay distributions to shareholders.  They related to ownership stakes of its former parent, Abengoa in Atlantica Yield which were reduced because of Abengoa's bankruptcy.  Atlanica is still working on obtaining similar forbearances for its ACT and Kaxu projects in Mexico, but the Mojave and Solana account for the majority of the outstanding forbearances in terms of the cash flow of the underlying projects.

As I said in the tweet, I anticipate that the next quarter's dividend will be at least $0.29 ($1.15 at an annual rate) up from $0.16.  The remaining forbearances should allow Atlantica to increase its quarterly distributions to at least $0.36 ($1.45 annually.)  I expect the stock to rise further when the anticipated dividend increase is announced.

NextEra Energy Partners (NYSE:NEP)
12/31/16 Price: $25.54.  Annual Dividend: $1.36 (5.3%). 
Expected 2017 dividend: $1.38 to $1.50.  Low Target: $20.  High Target: $40. 
1/31/17 Price: $31.53.  YTD Dividend: $0.  Annualized Dividend: $1.41.  YTD Total Return: 23.45%

NextEra Energy Partners released its fourth quarter earnings on January 27th.  Not only did it extend its 12% to 15% distribution growth outlook for the next five years, but the company's parent, NextEra (NEE) agreed to reduce its Incentive Distribution Rights (IDR) from 50% of incremental distributions to 25%.  With more of the money going to NEP shareholders, it seems much more likely that NEP will be able to achieve its aggressive distribution growth target.

Other Income Stocks

Covanta Holding Corp. (NYSE:CVA)
12/31/16 Price: $15.60.  Annual Dividend: $1.00 (6.4%).  Expected 2017 dividend: $1.00 to $1.06.  Low Target: $10.  High Target: $30. 
1/31/17 Price: $16.1.  YTD Dividend: $0.  Annualized Dividend: $1.00.  YTD Total Return: 3.2%

Waste-to-energy developer and operator Covanta drifted upwards without significant news.  The stock did have a hiccup on January 9th when it was revealed that county officials in Maryland were investigating a fire at one of its facilities in December.  I don't expect this investigation will have a significant impact on the company's profitability going forward. 

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

Seaspan Corporation, Series G Preferred (NYSE:SSW-PRG)
12/31/16 Price: $19.94.  Annual Dividend: $2.05 (10.3%).  Expected 2017 dividend: $2.05.  Low Target: $18.  High Target: $27. 
1/31/17 Price: $22.70.  YTD Dividend: $0.51.  Annualized Dividend: $2.05.  YTD Total Return: 16.4%

The stock and preferred shares of leading independent charter owner of container ships recovered strongly in January in what I believe was a rebound from tax loss selling.  They have fallen back significantly in the first couple days of February when Morgan Stanley initiated coverage of the common shares at "Underweight." 

The reasoning behind this rating rests on a probably cut in the common's dividend which I also anticipate.  A dividend cut for the common shares will only make the preferred dividends safer, hence the sell-off in SSW-PRG is unjustified, and this is a good opportunity to buy the preferred if you did not get a chance before it rose at the start of the year.

Growth Stocks

MiX Telematics Limited (NASD:MIXT).
12/31/16 Price: $6.19.  Annual Dividend: $0.14 (2.3%).  Expected 2017 dividend: $0.14 to $0.16.  Low Target: $4.  High Target: $15. 
1/31/17 Price: $7.14.  YTD Dividend: $0.  Annualized Dividend: $0.14.  YTD Total Return: 15.3%

Vehicle and fleet management software as a service provider MiX Telematics rose in January, perhaps in anticipation of strong quarterly results to be announced on February 2nd.  I have not finished reviewing these results as I write, but they were very good.

Aspen Aerogels (NYSE:ASPN)

12/31/16 Price: $4.13.  Annual Dividend and expected 2017 dividend: None.  Low Target: $3.  High Target: $10. 
1/31/17 Price: $4.66.  YTD Total Return: 12.8%

Aspen Aerogels rebounded from last year's lows most likely due to the abatement of tax loss selling, since there was no news of any significance.  The company will release its fourth quarter results on February 23rd/

Final Thoughts

All in all, it was a great January for my model portfolio.  The shock of the Trump victory last November caused clean energy stock to sell off regardless of what the new President and the Republican Congress are likely to do now that they are in control of government.  This sort of panic selling leads to opportunities for calmer investors, and I think this is part of the explanation of my outsized one month gains. 

The pleasant surprises in NextEra Energy Partners' and MiX Technologies' earnings, and the anticipated good news from Atlantica Yield added to the gains.  I can only hope that so many of my predictions (not to mention dumb luck) will continue to go my way for the rest of the year.

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

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

February 01, 2017

Climate Bonds 2016 Highlights

by the Climate Bonds Team

A record year with green bond issuance of USD 81bn, up 92% on 2015 figures

 green bond trends 2016

The Trends

A maturing of the green bonds market, diversification across issuers, products and use of proceeds are the main trends identified in our Green Bonds Highlights 2016 summary.

The Big Numbers

92% – growth on 2015 making 2016 the most prolific year to date

USD 11.8bn – November issuance, the largest month on record

24 – number of countries with green bond issuers

27% – proportion of Chinese issuers

241 – number of labelled green bonds issued (median size USD133.7m)

>90 – number of new issuers

>50 – number of repeat issuers

USD 4.3bn – largest single green bond ever issued from the Bank of Communications (China)

1st Sovereign – Republic of Poland became the world’s first sovereign issuer

regional trends

China the Big Mover

Green bond debt raised by Chinese entities rose from 8th in 2015 to 1st place in 2016, accounting for more than a quarter of the 2016 global total.

This follows increasing awareness of environmental issues in China which has been followed through to policy and financial decision-making.

More information on major developments is available in English and Chinese in our special China Green Bonds Market 2016 report.

Read More Highlights

There’s more to read in the full summary, download it here.

The Last Word - Three things to watch for in 2017

More issuance from sovereign and sub-sovereign issuers as governments try to mobilise green investment and support market liquidity.

Policy developments will push green finance even further as the G20 nations prioritise climate action. This will also encourage greater harmonisation of green bond guidelines across markets.

Over-subscription of green bonds and tight pricing will remain and we expect to see more issuers from lower rating bands coming to market.

——— The Climate Bonds Team includes Sean Kidney, Andrew Whiley,Bridget Boulle, Jonny Wyatt, Beate Sonerud and Camille Frandon Martinez.  
 The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

January 30, 2017

Insider View on REGI

by Debra Fiakas CFA

Insider buying is not one of my regular screening criteria in selecting long plays in the small cap sector.  However, to learn a chief executive officer has taken out his/her check book to buy shares in their company is influential.  In November 2016, the CEO of biofuel producer Renewable Energy Group (REGI:  Nasdaq) reported an increase in his stake in the company in recent months.

With REGI shares just above the prices paid by the CEO just three months ago, it is timely to look more closely from the outside.

In the most recently reported twelve months, Renewable Energy Group produced $1.87 billion in total sales of renewable diesel and chemicals, resulting in a net loss of $71.9 million or $1.70 per share.  Those two metrics are only part of the story as the company also reported generating $52.2 million in operating cash flow in the same period.   Using its typically low-cost feedstock such as inedible corn oil and used cooking oil, the company lays claim to being a low cost biofuel producer.  Nonetheless, the company has come through a particularly tough period in 2015, when thin margins failed to deliver enough profit to cover fixed costs.  Yet even during this difficult period, operating cash flows remained positive.

Free cash flow, that is operating cash flows net of investment requirements, may be a more helpful metric to evaluate a renewable energy producer.  REG operates a dozen biorefineries in North America with total nameplate capacity just over 450 million gallons per year.  The company is moving aggressively to expand its footprint.  In November 2016, management trooped out to Iowa to stage a showy groundbreaking ceremony with Iowa’s high profile governor, Terry Branstad.  The group turned over first shovels on a project to expand its Ralston biorefinery capacity from 12 million to 30 million gallons.

The price tag for the Ralston expansion is estimated at $24 million.  This is easily fit into the company’s regular budget.  Renewable Energy invested $42.8 million into its plants in the first nine months of 2016.  Indeed, capital investment has averaged $54.6 million per year over the last three years.  Operating cash flows have been more than ample to cover capital investments into existing plant and equipment, leaving $29.5 million in average annual free cash flow.

REG management has had no difficulty in finding places to use that extra cash.  Approximately $84.4 million in cash has been used to acquire new operations since the beginning of 2013.  The most recent deal in March 2016, was the acquisition of a biodiesel refinery in Wisconsin owned by Sanimax Energy.  REG paid a total of $21.1 million for 20-million gallons in nameplate capacity in a combination of cash and stock.
A more significant deal was struck in August 2015, for a facility in Grays Harbor, Washington that added 100 million gallons to the company’s total capacity.  A total of $36.7 million in cash and stock valued at $15.3 million were paid up front.  An additional $5.0 million was promised contingent upon achievement of milestones in renewable diesel production in 2016 and 2017.

A growing, profitable operation should be of interest for most investors.  The one reservation that investors should have regarding REGI, is the possible fall out of favor for renewable energy producers.  REG management has come out in support of a recent proposal for the 2017 standard set by the Environmental Protection Agency for Advanced Biofuel Renewable Volume Obligation from 4.0 billion gallons to 4.28 billion gallons.  Biomass-based diesel is a direct beneficiary of the standard.  Given the antipathy expressed by the incoming occupant of the Oval Office toward the environment and climate, renewable energy may not be a particular priority.  Indeed, petroleum-based energy is most often the lips of Trump and his surrogates.  Hopefully, REG management made a good impression on Branstad while they were in Iowa to put a good word in for renewable diesel.

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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