May 15, 2017

Ocean Power’s Stock Offering

by Debra Fiakas CFA

The first two lines of the prospectus for the April 2017 public stock offering by Ocean Power Technologies (OPTT:  Nasdaq) say all investors need to know about the market opportunity for the company’s wave power generation products.  First, the earth’s surface is covered 70% by water.  Second, over 40% of the world’s population lives within 150 miles of a coastline.  If the earth is dominated by water and a good share of our energy-hungry population lives near that water, doesn’t it make sense to turn the ocean into a renewable energy source?
If market opportunity based on common sense was all required for a stock offering, Ocean Power might have been able to sell new shares nearer its 52-week high price of $15.65 rather than a penny below the 52-week low of $1.31.  In the final trading days leading up the pricing on April 27th traders paid as much as $3.67 for the shares.  However, underwriters were frightened off, setting the offer price at a NEW 52-week low.

Perhaps there is more to prove than market opportunity…or market opportunity is not what it seems.

One question mark could be the company’s flagship technology.  Ocean Power Technology is on the cusp of commercializing a line of ocean wave conversion systems branded PowerBouy.  The PB3 PowerBuoy is intended for use in remote locations off-shore and can generate up to three kilowatts of peak power.  It comes with an energy storage system that has a 150 kilowatt hour capacity.  As we have noted an earlier article in September 2016, “Navy Buoys Up Ocean Power Tech”, the U.S. Navy has been an early and loyal follower.  The Navy’s product development grant was on top of a deal discussed in an earlier article “Ocean Power Nets A Discerning Buyer” in June 2016, which described a lease of the PB3 by Mitsui Engineering and Shipbuilding.

Thus it seems PB3 PowerBuoy is likely a strong product, built on sound technology and delivering the performance its engineers have promised.  Testing by two high-profile customers provides strong endorsement.  However, the intended applications for the PB3 in remote locations are a long way from “the 40% of the world population that lives 150 miles from the coast.” If the intended market is only in remote locations, market opportunity might not be as suggested by the opening lines of Ocean Power’s prospectus.

Ocean Power has identified four different types of customers:  oil and gas, defense and security, ocean observing and communications.  The ocean is a busy place and there are numerous installations in each of the four categories.  On the plus side, potential customers would be easy to identify and target with marketing and sales campaigns.  Ocean Power is even narrowing its target markets to certain of plum geographies to make the most of its new capital resources.  Then again, demand, especially in the oil and gas sector, might be subject to periodic peaks and lows as each customer group contends with own business cycles.  Perhaps most important, the remote location market will be rife with competing energy solutions, such as solar power, fuel cells or systems using conventional fuel.  Management contends its solutions will be viewed as a cost-competitive solution, and this may be necessary to gain a place at the table.

Investors might now be getting a hint as to why the OPTT offer price was set at a record low level rather than at a high.  Even if market opportunity is not as significant as is implied by the ‘40% of the population’ opening line of the prospectus, Ocean Power may still have a place in the hydrokinetic energy industry.  The company will be among few bringing ocean power solutions to remote installations in those very waters.  That should provide some upside to the $1.30 follow-on offering price.

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.

May 11, 2017

Icahn’s Pig in a Poke

By Brent Erickson, Biotechnology Innovation Organization

Members of the U.S. Senate are questioning whether Carl Icahn’s lobbying to change the Renewable Fuel Standard creates an ethics conflict with his role as advisor in the Trump administration. In addition to the ethics question, Members of Congress and some in the biofuels industry should examine whether Icahn could even deliver on the purported quid-pro-quo even if he wanted to.

In late February 2017, Icahn and a biofuel trade association reportedly discussed a presidential executive order to make Icahn’s desired change to the RFS Point of Obligation (the so-called POO) in exchange for modifications to unconnected policy priorities for biofuel producers. The proposed “deal” essentially was a non-starter, since altering federal policies is a far more challenging task than Icahn or his partners care to admit publicly. In short, the reported “deal” cannot be accomplished simply by waving a magic wand or through a presidential executive order.

Icahn claims the RFS exacts a disproportionate toll on his business interests, and he therefore wants to move the POO as far from CVR as possible. Icahn Enterprises owns 82 percent of CVR Energy, which includes two oil refineries – one in Kansas and a small one in Oklahoma – and a rack marketing terminal for selling finished fuel. Despite owning the rack terminal, CVR protests it cannot blend enough biofuel to meet the obligation and must therefore buy Renewable Identification Numbers (RINs) on the market. However, Reuters has reported that CVR sold RINs on several occasions in the past year, creating a short position in the market and apparently gambling that it can escape the obligation or buy the RINs back at a deflated price. Based on Reuters’ reporting, Icahn has made a $50 million windfall on the deal, and Senators are now asking whether he influenced RIN prices through his connections to the administration and campaign while making the trades.

When Icahn was named a special advisor to the President on regulatory reform in December 2016, many different stakeholders erroneously believed he would quickly push through changes to the RFS and exempt his refineries from having to purchase RINs. Indeed, the “deal” presented to the White House by Icahn this past February was purported to be “non-negotiable.” But federal laws are made of sturdier stuff than that and several prior attempts to move the POO are now stumbling blocks to Icahn’s goal.

In November 2016, EPA proposed to deny petitions filed by the American Fuel and Petrochemical Manufacturers and several independent refiners asking the agency to change the point of obligation. Notably, not all petitioners agreed on who should be obligated, and some of the various petitions may not have exempted CVR. EPA made a strong economic case that moving the POO would not increase production and use of biofuels, as petitioners claimed; in fact it would likely disrupt RFS stakeholders’ investments and thereby decrease biofuel use. By law, if EPA now decided to reverse itself and move the POO, it would have to present a rational argument for doing so – one that countered its own previous evidence. An executive order to change the POO would likely face a Court challenge. EPA would have to undertake a new rulemaking and respond to comments from numerous groups opposed to moving the POO, including most biofuel producers and several oil producers.

The other part of the February “deal” floated by Icahn offered a few tidbits for the ethanol industry. Chief among them was a waiver of gasoline volatility standards for blends of 15 percent ethanol (E15) to allow E15 to be sold in summer months. Gasoline evaporation contributes to ozone formation. Ethanol burns cleanly, decreasing engine tailpipe emissions, and therefore the standard 10 percent ethanol gasoline blend (E10) earns a small waiver of evaporative emissions limits. E15 blends reduce both evaporative and tailpipe emissions compared to E10 but don’t qualify for the waiver because Congress’s 1990 amendments to the federal Clean Air Act specify E10. A White House executive order on E15 does nothing to change EPA’s well-documented position on the matter or alter the legal or procedural landscape around the issue. Even worse, EO’s are not legally binding. So the biofuels industry would have no recourse to force regulators to follow through on the E15 waiver.

Icahn’s “deal” was rumored to offer the ethanol industry changes to EPA’s Motor Vehicle Emission Simulator (MOVES) model, which is used by the agency and states to develop policies to meet National Ambient Air Quality Standards (NAAQS). The MOVES model is indeed flawed because it uses input parameters from an April 2013 fuel study that was basically designed to attribute tailpipe emissions to the ethanol content in the gasoline. So, to correct the flaws in the model, EPA must redo the study. But in April, the Trump administration proposed to eliminate funding for the EPA office that conducts fuel and engine tests, creating a new potential hurdle that – at a minimum – would conflict with any potential executive order to change the MOVES model.

The most absurd part of the Icahn “deal” was a proposal for the extension of the $1 per gallon biodiesel tax credit, which expired at the end of 2016. The White House does not have the authority to grant this or any other tax policy via executive order. Tax policy is set by Congress and Presidential recommendations mean little on Capitol Hill.

The biofuels industry has opposed moving the POO primarily because it would require lengthy rulemaking and disrupt an RFS program that only recently got back on track. Further delays and uncertainty on something as fundamental as who’s obligated will hurt advanced biofuels producers more than most. Even the American Petroleum Institute (API) opposes changes to the POO.

But the real problem here is even if you like the alleged carrots Icahn dangled in front of ethanol producers to justify moving the point of obligation, an executive order does nothing to change the federal Administrative Procedures Act or the other bodies of law that will prevent the industry from collecting on the “deal” after we’ve given Carl Icahn what he wants.

Brent Erickson is executive vice president in charge of the Industrial and Environmental Section at the Biotechnology Innovation Organization (BIO). BIO represents more than 1,200 biotechnology companies, academic institutions, and state biotechnology centers across the United States and in more than 30 other nations.

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

May 04, 2017

Amyris Boards The Sweet Fleet

Jim Lane

Back in September 2015, we reported that Amyris inked a multi-year agreement with the US Defense Advance Research Projects Agency, the famed DARPA that gave us everything from kevlar to the Global Positioning System and the Internet — the goal in this $35M agreement with the Biological Technologies Office was to create new research and development tools and technologies — compressing the time to market for any new molecule by at least 10-fold in both time and cost.

The story expanded this week when we heard from Amyris (AMRS) that it had completed strain engineering and optimization to 26 key metabolic precursors across multiple organisms – including many different pathways beyond terpenoids allows Amyris to develop an industrial-scale fermentation process for virtually any biological molecule.

In addition to the expansion of the range of metabolic precursors, Amyris has revealed that it has now expanded its high-throughput yeast strain construction and testing pipeline to several other industrially-relevant organisms.

Living Foundries

The DARPA was called Living Foundries.

The molecules were anticipated to include chemical building blocks for accessing radical new materials that are impossible to create with traditional petroleum-based feedstocks.

These advancements have the cumulative effect of drastically reducing the R&D costs and timelines for developing a commercial process for any biological target, irrespective of the final application of the molecule. This is empowering Amyris with additional resources to develop next-generation capabilities to further advance its competitive position and accelerate its capabilities to produce go-to-market sustainable supply solutions at industrial scale for its partners.

“The DARPA-funded TIA has allowed us to continue our pioneering efforts at applying automation, next-generation analytics, and machine learning algorithms to find biological solutions to the bio-manufacturing sector,” said John Melo, Amyris President and CEO. “Amyris has always been at the forefront of utilizing big-data analytics and cutting-edge tools in the biotechnology sector, and our recent R&D results continue to pave the way toward expanding our footprint in multiple markets where fermentation-derived products offer our partners and consumers a sustainable, scalable source of supply.”

The new sweetener

Not completely unrelated to Amyris’ new-found chops in strain construction is the news that Amyris has “made significant progress” in the development of its healthy sweetener product technology and expects industrial production to occur in 2018. We reported on this earlier this week in our sister publication, Nuu.

Amyris is making a No Compromise sweetener and says it is “on track to be the low cost leader at industrial scale production” with a natural-like sweetener with very low calories that is sustainably sourced. Amyris’s target is to sell the world’s leading sweetener at a lower cost than sugar without any negative taste. Consumers love soda but hate sugar — Amyris wants to make soda taste the same and be healthy. The company expects this product opportunity in partnership with its partner to deliver over $100 million in annual revenue by 2020.

Beyond conventional sugar as a starting point

One of the things that the announcement portends is a step beyond conventional sugars as a feedstock in a conventional way. Note that Amyris will be selling at a lower cost than sugar.— and that rules out starting from conventional sugars in a conventional way.

One possibility? The company could be targeting something like xylitol — which is a C5 sugar and used as sweetener. Or, sorbitol — which is a C6 sugar alcohol that the human body metabolizes more slowly than conventional sugars. A patent search has not yet revealed any particular targets coming out of Fortress Amyris.

Polyalcohols are often used in foods like gum or even toothpaste because they offer the sweet taste without the cavities. However, they aren’t cheap as they can’t be found easily in nature and when produced industrially, they need very specific and controlled environments making it a pain for wide scale production.

We reported in Nuu last December that the Institute of Chemical Research of Catalonia and the Swiss Federal Institute of Technology researchers found a way to get polyalcohol sweeteners like mannitol or ribitol from cheap renewable sources like glucose. By being able to reorganize sugar atoms, researchers found a way to get the valuable polyalcohols from regular sugar easily and more affordably, bringing a smile to candy, gum and toothpaste manufacturers around the world.

Or, the company is proceeding from a novel sugar precursor where it can generate a higher yield. such as starting from unprocessed cane juice, which has the molasses still in the mix (in conventional white sugar refining, all the molasses is removed).

So, there are questions to be answered and we are standing by on that.

“Our focus on supplying the lowest cost, best performing products into Health & Nutrition and Personal Care markets by partnering with the leading brands has very strong momentum,” said John Melo Amyris President & CEO. “Our efforts to give the consumer sustainably sourced, best performing products without dangerous ingredients is really starting to payoff. We believe we have the leading market position for sustainable, healthy sweeteners and we are very excited about helping the world transition away from unhealthy sugars and accelerate the use of healthy sweeteners by providing the consumer a better taste experience and our partners better economics.”

The Race for a Next-Gen Sweetener

The race for the next big sweet-tooth satisfier has been heating up significantly.

We reported in April that Cargill and Evolva inked a major collaboration pact for the production and commercialization of EverSweet, the next-generation stevia sweetener. This product is on track for a 2018 launch, securing its first-mover advantage.

Over the next three years, principally in 2018 and 2019, Evolva expects to invest an estimated USD 60 million in the combined fermentation and bioprocessing facilities for EverSweet and its other products. The recent CHF 30 million equity commitment from Yorkville serves as a foundation for this investment and Evolva expects to secure an additional project financing package of around CHF 30 million by end 2017, which will enable full execution of the plans.

We reported in Nuu in February that MIT spin-out Manus Bio is using multivariate modular metabolic engineering to design microbial pathways that produce larger volumes of commercially interesting compounds.

Using MMME, the company has developed a fermentation-based process to produce Rebaudioside M with greater than 95% product purity. Currently, the alternative sweetener is derived in low yields from the stevia plant.

“Slapping genes together to make a product is fine, but this doesn’t give you a platform for producing something economically,” Stephanopoulos says. “There’s a big jump between making a few milligrams of a compound and a few grams, which is what you need to make it commercially viable.”

MMME involves using enzymes to “cut the linear pathway into a network of separate, distinct modules that can be more easily controlled and modified.”

Manus is also working on developing a route to nootkatone, a grapefruit extract that is a natural insect repellent. Traditional nootkatone production methods cost several thousand dollars per kilogram.

We also reported last October that S2G BioChem had entered into a license and collaboration agreement with Mondelēz International — a leader in biscuits, chocolate, gum, candy and powdered beverages — to help commercialize a sustainably-sourced supply of the food ingredient xylitol using a proprietary co-production technology.

Commercial-scale production of the sustainably-sourced food ingredient xylitol is expected to begin in 2018. Mondelēz owns billion-dollar brands such as Cadbury, Nabisco, Oreo, Trident and Dentyne.

We also reported last November that DSM asked Europe’s food safety regulators to approve the use of stevia produced using fermentation. The popular sweetener has already been okayed for consumption in Europe, although the regulation stipulates it be produced via water extraction of the Stevia rebaudiana plant followed purification and recrystallization. DSM’s process uses fermentation with a genetically engineered yeast to steviol glycoside.

The Bottom Line

New targets at new speeds — that’s what DARPA is trying to change. Clearly they’re looking not only for next-generation materials that have advanced properties with potential military applications — they’re looking to endow friendlies with the capability to make them faster. That not only changes the economics; it changes the potential that science can respond more effectively to the shortages, disruptions, and theater-level strategic opportunities that conflict brings.

The connection between DARPA and sugar might not be obvious. Of course, not everyone saw the point of demonstrating an internet, either, back in the days of ARPA.

The connection here is that a commercially-relevant challenge like a sugar alternative — and the race to get to market at the lowest cost — presents an opportunity to develop tools that DARPA will need for a host of molecules that no one knows how to make affordably and commercially — if we know how to make them at all.

Stronger materials, more flexible materials, materials that think, materials that respond to conditions — whether it is lightweighting military vehicles or providing better protection to military personnel, or just finding things that explode better — DARPA has a real stake in developing manufacturing and, for military applications, speed has an incredible premium.

DARPA shares a passion for pace with every company chasing a new sweetener — and also with every investor who would like industrial molecules to come out at scale, faster, from the new industrialists like Amyris. The collaborations are getting mighty interesting.

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.

April 30, 2017

Take A Bromide For Flow Battery Frustration

by Debra Fiakas CFA

The most recent article Vanadium Flow Battery Stocks: Barely A Dribble may have disappointed some investors who were expecting more opportunity for a stake in building energy storage.  Large scale energy storage is an idea to which many in the utility industry speak, but few power producers have made significant investments beyond lithium ion batteries.  Flow batteries have long been touted as a cost-effective and technically superior alternative for wind or solar power storage or for load-balancing efforts on the electric grid, as examples.  In the last post we looked at the flow battery producers using vanadium materials as the foundation for the electrolyte that literally flows through the cells of these novel battery designs.  In this post we look at an alternative material  -  zinc bromide.

A zinc bromide salt is dissolved in water and pumped through a stack of cells in the battery, which functions much like an electroplating machine.  As the battery charges, the zinc is electroplated onto conductive electrodes as the bromide forms.  When the battery discharges, the reverse process takes place as the metallic zinc ‘plated’ onto the electrodes dissolves into the electrolyte. The zinc is not used up and can be plated back again in the next charge cycle.

There are some special considerations for zinc bromide flow batteries.  One problem is the need to discharge regularly, otherwise zinc dendrites can form and puncture the separator between the cell stacks.  The electroplated zinc can be stubborn, requiring a special, periodic step to fully remove zinc from the battery plates.

A big plus for zinc bromide is cost.  An inorganic compound, it can be produced through a reaction of zinc metal and bromide, a salt of hydrobromic acid.  Zinc is one of the most common elements on earth and is a readily available commodity.  While relatively inexpensive, we note that zinc has increased over 30% from a year ago.  Zinc reached an all-time high price in 2006 at over $4,600 per ton in November 2006, but has since retreated to $2,615 in early April 2017.

Zinc bromide is already widely used in the oil and gas industry as drilled wells are prepared for the pumping or harvesting phase.  Zinc bromide is considered toxic and requires special equipment and safety precautions for handling.

Primus Power (private) is selling its EnergyPod 2 for long duration energy storage solutions. In January 2017, the company announced its second sale and installation in Kazakhstan for Samruk Energy, a sovereign wealth fund.  The first system is installed at the Kapchagai solar power station and the second will at the Yereymentau Wind Power Station in Kazakhstan.  Primus Power’s management thinks its EnergyPod is cost competitive because of an extended useful life of twenty years.  Primus uses titanium for the battery electrodes, which is enabling up to 15,000 charge and discharge cycles compared to the usually 10,000 in most other flow batteries.  Earlier this year Primus management bragged that Microsoft is testing a storage system using the EnergyPod 2.

Investors can get involved with Primus Power, although there will be a bit of a wait. The company just completed a private equity financing, taking in $32 million in new capital.  That brings total capital raised to $94 million from a widely scattered group of investors from Hong Kong, Saudi Arabia, Russia and the U.S.

Redflow Limited (RFX:  ASX) is targeting entirely different markets  -  industrial, commercial and residential applications.  Redflow’s ZBM2 battery has capacity of 10 kilowatt hours.  With a fully enclosed form factor and no need for ambient cooling the systems seems ideal for storing energy at telecommunications and other remote sites.   The LCB system links several ZBM2 units together to deliver peak 300 kilowatts.  It is larger, but still fits in a standard shipping container.   Event the LCB system can be positioned in parallel to provide scalable solutions.  For the residential user Redflow sells the ZCell with a10 kilowatt hour capacity to store energy from solar panels or wind installations.  It is fully enclosed in a sleek design that fits well into the home environment.  

The company is a bit more accessible for investors at least to those who are prepared to trade on the Australia exchange. Redflow has not yet delivered profits and so trades with a negative price/earnings ratio on both a trailing and forward basis.  From a cash earnings standpoint the picture is still a bit cloudy as the company has still not reached positive cash flow.  Looking at the glass as half full, this means Redflow must tap the capital market from time to time to keep operations going, providing opportunities for qualified investors to get a piece of the pie.

For U.S.-based investors who do not want to venture too far afield, there is EnSync, Inc. (ESNC:  NYSE), a zinc bromide flow battery developer in headquartered in Wisconsin.   EnSync wants to serve commercial and industrial markets with a ‘behind the meter’ solution it calls Matrix Energy Management coupled with its Agile Hybrid Storage system of zinc bromide flow batteries and lithium ion batteries.  EnSync also offers the Agile Flow Battery on a standalone basis.

In the twelve months ending December 2016, EnSync reported $10.8 million in total sales, resulting in a net loss of $18.9 million.  Operations required $10.3 million in cash to support operations.  At the end of December 2016, the company had $17.6 million on its balance sheet, which could give EnSync the runway needed to get operations off the ground and to breakeven.

The Matrix Energy Management system and the ability to offer battery alternatives could be EnSync’s key competitive strength.  The company recently announced a contract win from the Alliance for Sustainable Colorado for a facility located in downtown Denver.  The project involves a 20-kilowatt rooftop solar installation, 84-kilowatt hour capacity EnSync lithium ion batteries, and EnSync’s software application to manage internal loads.

While the zinc bromide battery developers still offer investment opportunities that are little more than options on flow battery technology, there appears to be far greater success in the market by this group than those with vanadium-based solutions.  Our field work did not uncover any technological reason behind why one group should have so much more success than the others.  However, we do note that the vanadium group has more members with a background in mining or producing vanadium.  It is possible that the mining or industrial materials production background does not lend well to the requirements of battery development and market penetration with a finished product.

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.

April 28, 2017

New Energy Exchange Limited Has A Market Cap of $3 Million, But Owns $54 Million of Liquid Stock

Esplanade Capital Issues Open Letter to the Board of New Energy Exchange Limited -- Urges the Company to Reregister with the SEC to Maximize Value for Shareholders

Esplanade Capital LLC, a significant shareholder of New Energy Exchange Limited (OTC PINK: EBODF), announced today that it has issued an open letter to the Board urging the Company to reregister with the SEC in order to maximize value for shareholders. The full text of the letter follows:

April 25, 2017

New Energy Exchange Limited (f.k.a. Renewable Energy Trade Board Corp.)
Board of Directors
Shun Tak Centre West Tower
Unit 1407
168-200 Connaught Road
Central, Hong Kong

Dear Members of the Board of Directors (the "Board"):

Esplanade Capital LLC ("Esplanade" or "We") urges New Energy Exchange Limited (the "Company", "EBODF", or "NEX") to reregister with the U.S. Securities and Exchange Commission (the "SEC") in order to maximize value for shareholders.

Having exercised extensive due diligence since 2013, We have verified that EBODF retains a $54 million equity position in a liquid $3 billion enterprise value, publicly traded company in Hong Kong. This stake compares to EBODF's current microscopic market capitalization of $3 million. In addition, We can also confirm that EBODF owns two Italian solar assets worth at least ~$32 million.

While we believe EBODF is carrying significantly more asset value, including operating solar power plants in China, Europe, and the US, and indeed some, albeit potentially modest, liabilities, we cannot fully corroborate these balance sheet items precisely due to EBODF having deregistered and "gone dark" in 2013. By reregistering, EBODF will provide shareholders an accurate inventory of its assets and liabilities while likely revealing an even greater mismatch between market and book value.

Through the management of Esplanade Capital Partners I LLC and Esplanade Capital Electron Partners LP, We and our affiliates have maintained a significant position in EBODF since 2013. As background, Esplanade was founded in 1999 and has been investing in the solar sector since 2004.

In fourteen years of solar investing, We have never encountered an opportunity as obscure and undervalued as EBODF. After discovering EBODF, an unregistered (since March 2013) but U.S. publicly-traded company, through our deep, global solar network, we conducted multidimensional due diligence through management meetings in New York, Hong Kong, and Shanghai, analysis of EBODF legacy SEC filings, and careful dissection of Stock Exchange of Hong Kong Limited ("HK Exchange") filings from sister-company United Photovoltaics Group Limited (686 HK), a leading solar independent power producer controlling ~1.4 gigawatts of solar power plants in China and the UK and wielding an ~US$3 billion enterprise value.

As context, We define the verifiable assets as EBODF's 335,683,070 share stake in 686 HK validated through HK Exchange filings as of April 19, 2017 and two Italian solar power plant assets acquired in June 2014. To wit, shares of 686 HK, EBODF's largest verifiable asset, have appreciated ~71% in 2017 while the Company's shares remain largely unchanged.

Share price vs holdings

After privately imploring management to reregister with the SEC and file updated financials to no avail, We have exhausted our patience and are forced to bring this matter to the public. The status quo cannot persist as shareholder value is being squandered.

For the sake of transparency, we are including details on the verifiable assets since most investors likely haven't reviewed the HK Exchange filings outlining EBODF's 686 HK stake and industry press detailing EBODF's acquisition of two Italian solar power plants in June 2014.

EBODF owns 335,683,070 shares of 686 HK (~4.5% of shares outstanding) as confirmed by a HK Exchange filing on April 19, 2017 (see page 5).

EBODF's stake in 686 HK is worth ~US$54 million at current market values. Other major holders of 686 HK include China Merchants New Energy Group (a massive China state-owned enterprise controlling 26.8% of 686 HK and ~17% of EBODF), ORIX Asia Capital (a US$95 billion Japanese asset management company controlling 14.4% of 686 HK), and the Asian Development Bank's Asia Climate Partners (the US$150 billion regional development bank controlling 4.5% of 686 HK) all of whom invested ~US$167 million alongside EBODF in 686 HK in March 2017.

In that March 2017 686 share subscription, EBODF purchased 68,799,449 shares of 686 HK at HK$0.5814 per share (see "subscription price" on pages 18-21) versus 686 HK's current share price of HK$1.25 thereby creating ~$6 million of equity value for EBODF shareholders in this single transaction (greater than twice the entire market capitalization of EBODF today).

In terms of the Italian solar power plant assets, EBODF acquired two projects comprising 13.1MW in June 2014. Based on the remaining subsidies and cash flow for each project, we estimate these two assets are worth at least ~US$32.0 million.

shareholding in 686HK

Whether simply a US Dollar denominated tracking stock for 686 HK or a solar independent power producer, EBODF is deeply undervalued and must reregister to maximize shareholder value and minimize the valuation gap.

Esplanade welcomes the opportunity to discuss the path forward directly with the Board.

Regards,

Shawn W. Kravetz
President

cc: Alan Li Shan (electronically), Maggie Qiu Ping (electronically), Lu Zhenwei (electronically)

ABOUT ESPLANADE CAPITAL LLC
Esplanade Capital is a Boston based investment management firm founded in 1999 to manage capital for a small number of like-minded families, private investors, and institutions

April 26, 2017

Vanadium Flow Battery Stocks: Barely A Dribble

by Debra Fiakas CFA
 
The previous post “Investing With The Flow Battery” introduced a series of articles on flow batteries for grid-scale energy storage.  Investors focused on renewable investments should at least consider the implications of storage requirements in evaluating renewable energy technologies even if storage developers are not considered portfolio-worthy.  Owners of grid-connected solar and wind power systems must design a network that can meet the highest peak load of the year even if a large part of the generating capacity sits idle for extended periods.  Storage technologies convert electrical power into chemical or mechanical energy and then send it to the grid when as needed.

Batteries, of course, fall into the category of chemical solutions.  According to the Department of Energy about 20% of the energy storage solutions in place today rely on batteries.  Total capacity is just over 300 megawatts.  Lithium ion technology represented the vast majority of this installed battery capacity.  Fast response time makes lithium ion batteries popular.  Unfortunately, they do not hold up well under repeated charge and discharge cycles.  Lithium ion batteries must be replaced frequently, increasing cost of operation.

The deficiencies of lithium ion battery technology have opened a door for flow battery technologies.  Flow batteries have a long battery life and tolerate as many as 10,000 charge and discharge cycles.  Additionally, the liquid electrolyte can be replaced, making it possible to extend the life of the battery through a refurbish cycle that delays expensive replacement.

Flow batteries are composed of two chemical components dissolved in liquids and separated by a membrane.  The liquids or electrolytes are pumped through a stack of electrochemical cells thereby converting chemical energy into electricity.  Ion exchange occurs through the membrane as the two liquids circulate in their respective cell.  This provides for the ‘flow’ of electric current. Energy capacity is determined by the electrolyte volume and the surface area of the membranes.

There are several flow battery developers that are using vanadium material -   a hard, silvery metal  -  for the electrolyte.  Vanadium is attractive to battery developers because it oxidizes into four different valence states, all four of which can be used for a flow battery.  On its own vanadium is tough to find.  It is almost always a by-product of another mining or minerals process.  China and Russia extract vanadium from slag produced by steel smelters.  It is also a by-product of uranium mining.

Most of the companies using vanadium materials for flow batteries are private.  Imergy and UniEnergy Technologies are two examples that cast something of a harsh light on the challenges of an early stage industry.

Indeed, Imergy’s story already has an ending and it is not a happy one.  In July 2016, the company filed for bankruptcy and is liquidating its assets, including the flow battery intellectual property.  Imergy’s success was in part the beginning of its end.  In 2015, the company has been tapped by SunEdison to provide vanadium flow batteries for an ambitious rural electrification project in India.  Unfortunately, Imergy only installed two systems before SunEdison’s own financial problems forced it to declare bankruptcy.  Having already extended its operations to meet the demands of a large order, Imergy was unable to land on its feet with the loss of that customer.  Venture capital backers abandoned Imergy and it was forced to close its doors.  There has been no public report of what entity might have gained control of Imergy’s flow battery technology.

UniEnergy Technology has managed to find success AND stay in business.  The company targets multiple markets, including utilities, microgrid, commercial, and industrial applications besides renewable energy systems.  The company differentiates itself from the other flow battery suppliers with a small footprint and user-friendly controls.  Perhaps the most compelling competitive advantage that UniEnergy has is its longevity and experience. UniEnergy has licensed flow battery technology originally developed over a decade ago at the Pacific Northwest National Laboratory run by the Department of Energy.  UniEnergy has been adding additional improvements in design since its inception in 2012, culminating in a demonstration project in 2015.  Most recently the company installed a 8-megawatt hour system on the grid in Snohomish County in Washington State.  While small in comparison to some lithium ion battery systems, the Snohomish system is the largest containerized flow battery system in the world.

On the other end of the spectrum there are very large companies in the flow battery space.  Through its subsidiary Gildemeister Energy Solutions, DMG Mori AG (GIL: GE or MRSKY:  OTC) offers vanadium-based flow batteries in 130 kilowatt and 200 kilowatt capacities.  Scalable systems of various sizes can be assembled through parallel connections of multiple CellCube units.  Gildemeisters has successfully installed several of its systems, but its financial profile is buried so deep in the financial reports of Gildemeister’s  parent company DMG Mori, it is not clear if it is a profitable venture.

A DMG MOri gives the investors so much more than vanadium-based flow batteries.   The company is one of Germany’s largest manufacturers of cutting machine tools, shipping its lathes and milling machines all around the globe.  The company converts almost 5% of its sales to operating cash flow, which helps support an ample dividend.  That said, the forward dividend yield is an attractive 1.7%.

Publicly traded American Vanadium (AVC:  TSX or AVCVF:  OTC) gives investors a chance for a pure play in the flow battery market.  The company has been the master sales agent in North America for Gildemeister’s CellCube.  The company has its origins as a vanadium materials producer with a focus on the battery market.  The company had mineral claims on a vanadium deposit in Nevada up through the end of 2016.  After working for years to develop a market for its vanadium materials, the company has integrated forward into batteries.  The move has the potential to capture more value from the shift in energy to renewable sources as well as the disaggregation of power systems from large grids to into smaller distributed systems.

American Vanadium made headlines with the installation of a CellCube system as a demonstration for the Metropolitan Transportation Authority in Manhattan, New York.  In early 2016, American Vanadium even made bid to buy the CellCube assets from Gildemeister, but was unable to raise sufficient capital and had to retract the offer.  Since then the company has even suspended marketing efforts in an effort to conserve its remaining capital.

Clearly along the vanadium arm of flow battery technology there are few options for investors.  A position in the healthiest company is more a stake in machine tools than flow batteries, albeit an attractive one with a regular dividend check.  The only dedicated vanadium flow battery developer is more ‘played out’ than ‘pure play’.

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.

April 20, 2017

The Problem With Proxy Ballots

Vote With Money Instead

by Garvin Jabusch

Many people assume that engagement with public companies through proxy voting and resolution filing is the best — if not only — way to see positive environmental, social, and governance outcomes from your investments. For me, this approach misses a fundamental point of market-based solutions: you make in investments in the most compelling ideas that reflect what you think is likely to grow, where you think the economy is headed, and yes, outcomes you support. That means using investments to favor firms that are already making innovative sustainable contributions to the global economy — not trying to Frankenstein aging, destructive, legacy companies into healthy new citizens.

Consider the recent case of a major advocacy victory with ExxonMobil. After years of effort, a shareholder advocacy coalition in January succeeded in persuading the company to place prominent atmospheric scientist and climate change expert Susan K. Avery on their board of directors. The theory is that surely Dr. Avery’s appointment signifies a change in attitudes at Exxon, and her expertise will encourage the company to incorporate climate change into its corporate strategies. Meanwhile, Exxon Mobil Corporation announced in February that its “proved reserves were 20 billion oil-equivalent barrels at year-end 2016.” That’s 20 billion barrels of oil they fully intend to extract for purposes of being sold and burned. This is what Exxon is; no new board member is going to change that. Speaking to Inside Climate News, Jamie Henn, spokesman for 350.org said, "It's hard to believe this is little more than a PR stunt meant to pave over the decades the company spent deceiving the public about the crisis." A cynic could conclude that shareholder activism’s largest victory to date vs. ExxonMobil adds up to a PR coup for the firm under fire.

Further, a lot of advocacy is ineffectual. For example, State Street Global Advisors has recently made news with a plan to use their proxy voting power to encourage Russel 3000 companies to place more women on their boards. What’s the plan, and will it work? Slate Money’s Felix Salmon explored this from the perspective of a Russel 3000 company with zero women on the board: “In a year’s time …if you still have zero female board members and you can’t persuade State Street that you have made moves to get more female representation on your board, then, if and when the chairman of your nominating committee gets re-nominated for a board seat, they will vote against that individual. I mean, come on.” State Street then seems to be engaging in a symbolic form of advocacy, and not seriously expecting to effect change in corporate behavior.

I’ve written elsewhere that “[r]eal impact depends upon voting with your dollars for the future economy, for the actual catalysts of change, for the viable growth areas where we can reasonably expect to earn good equity growth in this era of rapid change. This means a higher level of due diligence that avoids the trap of thinking public equities are ‘set it and forget it’…it's not that public equity portfolios can't have impact, it's just that they usually don't” (emphasis added).

So how do we measure the impact of a portfolio if not by activism? I say it’s about looking at the economic impact of your investments. Invest in the firms that are earning more revenue from creating environmental and social solutions, employing more people, and gaining market share from riskier and less efficient competitors. While this may be harder to quantify than tallying up shareholder proposals, these business and economic factors have dollars behind them, and that means they equal impact at scale. At the end of the day, an economy driven by products and services that address the environmental and social risks confronting the global economy has much greater positive impact than an economy of ExxonMobil’s touting their lone climate scientist board member. The traditional metrics of business are the metrics for a reason: they measure real results. Investing in solutions providers exhibiting the best of these metrics is simply the most powerful message we can send.

Clearly, it’s more environmentally, socially, and economically meaningful to vote with dollars rather than proxy ballots, but it also has greater financial potential. Today, business-as-usual investing in S&P 500 companies means buying a flat 12 month forward earnings per share (EPS) estimate average, paired with a high average price to book valuation. On the other hand, many solutions –like renewable energy, organic farming practices, and water management are growing EPS more rapidly, yet many of them remain undervalued. Investors can send the market a powerful signal about which investments matter and have quantitatively better odds at superior returns by opting for these solutions-creators, rather than the overvalued companies of the old economy. Faster growth at a cheaper price? This is what investment managers are supposed to be seeking, but is almost absent from major benchmarks.

It’s easy to keep investing in stalwarts of the old economy like the S&P 500, then reassure ourselves that shareholder engagement will solve our problems. But it won’t. Let’s be honest with ourselves: we know it is time is stop making lazy and, ultimately, destructive investment decisions based on the inherited wisdom of indexing or for fear of not tracking our benchmark, and then justifying those investments by citing engagement. Addressing systemic risks – like climate change, resource scarcity, and widening inequality – means buying companies that are solving big risks and avoiding firms contributing to risk. This sends the markets a strong signal about the economy’s evolution, and also means that there’s a lesser need to engage these companies in the first place.

Shareholder advocacy can certainly have positive impact, but there’s an important caveat to remember. In the end, companies only care about shareholder proposals when they identify ones that already align with the firm’s self-interest and end goals. Limiting fossil fuel use and climate change is not in ExxonMobil’s self-interest, and no number of resolutions, proxy votes or polite letters is going to change that. As such, shareholder engagement can initiate positive change within the existing goals and structures of a company but not in a company’s fundamental reason to exist. Thus, advocacy is most effective when practiced on firms already engaged in a business that lends itself to the goal favored by the activist. You can work with a solar company to help them improve their supply chain or to have more minority representation in leadership, but you can’t persuade an oil company not to drill. Shareholder advocacy can and does have positive impacts around the periphery of big issues like climate change, but its power is trivial next to the power of the underlying economics. And the brightest signal of the economics is markets and returns.

To illustrate, join me in a short thought experiment. Imagine you’re the CEO of an oil major, say ExxonMobil. What concerns you more: a world where everyone keeps buying index funds that bump your stock price every time they do, but occasionally people file resolutions that you largely ignore, or a world where everyone has decided simply to skip that and invest instead in what’s next, eschewing fossil fuels altogether? I know for sure which of these worlds the CEO of Exxon most fears, and that tells me all I need to know about how to have impact.

An version of this post originally appeared 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."

April 13, 2017

Investing With The Flow Battery

by Debra Fiakas CFA
 
The looming threat of global warming has nearly everyone  -  except perhaps those bickering with each other in the Whitehouse  -  scrambling for lower carbon energy sources.  Intermittancy remains a stumbling block for several of the lower-carbon renewable energy sources, particularly wind and solar energy systems.  To be a serious contributor to grid-connected power systems these energy sources need utility scale batteries that can store energy when the sun is down or winds have died away.  Unfortunately, with current technology the cost of such battery capacity increases the levelized cost of energy (LCOE) of renewable systems to an uncompetitive price tag.

As a refresher, LCOE is a measure of the average total cost to build and operate a power-generating asset over is lifetime relative to the total energy output over that lifetime, i.e. total costs divided by total output.   Typically expressed as cost per kilowatt hour, it is handy for comparing different methods of electricity generation on a consistent basis.  The more bells and whistles a system requires to produce power  -  and meet environmental standards  -  the higher the LCOE per kilowatt hour.

Let’s get back to those batteries that could help make wind and solar ‘grid-attractive’.  Lithium ion batteries have been the most talked about battery storage technology in recent years.  Unfortunately, lithium ion batteries do not have a particularly long useful life, lasting only a few hundred charge/recharge cycles.  As a consequence, batteries using lithium ion technology could add as much as $0.33 per kilowatt hour to the LCOE for wind or solar power systems with a storage component.

Flow battery technology is considered a viable alternative to lithium ion batteries for stationary power sources.  Flow technology converts chemical energy into electricity by pumping electrolytes through a stack of electrochemical cells.    First, as tested so far, flow batteries show promise for numerous charge/discharge cycles.  Some flow batteries can last through as many as 10,000 cycles.  Second, flow batteries rely on a fluid electrolyte that can be replaced, reducing the overall cost of operation.  Thus it is expected that flow batteries will present a far lower LCOE contribution  -  a factor that makes it more appealing for wind and solar system operators.

There is a gaggle of developers with flow battery projects underway or with commercial-ready battery products.  Vanadium has been the preferred material for several years and several vanadium-based storage systems are already in operation.  Zinc bromide runs a close second. The most recent innovation is based on iron, which offers the benefits of better safety and lower operating cost.  Iron-based flow batteries are also considered to be more environmentally friendly than those relying on strong acids like vanadium.

The next few posts will take a closer look at the utility-scale battery developers and producers.

Company Name
Symbol
Flow Technology
Status
American Vanadium
Vanadium
Commercial
Arotech (Electric Fuel Energy)
Iron
Development
Gildemeister (Cell Cube)
Private
Vanadium
Commercial
Energy Storage Systems
Private
Iron
Development
EnSync Energy Systems
Zinc bromide
Commercial
Imergy
Private
Vanadium
Commercial
Primus Power
Private
Zinc bromide
Development
RedFlow
Zinc bromide
Commercial
UniEnergy Technologies
Private
Vanadium
Commercial
Sumitomo
SSUMY:  OTC
Vanadium
Commercial
Vionx Energy
Vanadium
Commercial

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.

April 07, 2017

New Bio-Based Tacky Resins Launched With Amyris Technology

Jim Lane

In France, Cray Valley has launched new tackifying resins produced with Amyris’ (AMRS) biologically derived Biofene branded farnesene.

Tack is the measure of stickiness — vital to everything from adhesives that need to hold things in place to inks that need to stay on the printed page.

According to independent market research firm, MarketsandMarkets.com, the global tackifier market is projected to reach USD 3.56 billion by 2020. This poses a large opportunity for renewable farnesene-based tackifiers and Amyris believes it can access a large market share as its product applications within the space achieve commercial scale.

Cray Valley’s Wingtack family of tackifying resins have been manufactured with piperylene (a volatile hydrocarbon that is a byproduct of ethylene production) as a primary source. Other tackifier resins typically are derived from trees or citrus fruit sources.

The Cray Valley backstory

Total Cray Valley is part of Total’s Polymers division within the Refining & Chemicals branch. Total Cray Valley manufactures Wingtack and Cleartack hydrocarbon resins, Poly bd, Ricon and Krasol liquid polybutadiene resins, SMA® copolymer resins, and Dymalink monomers. These products are used as raw materials and additives for adhesives, rubber, electronics, thermoplastics, coatings and other applications.

The switch to biofene

Utilizing new technology has enabled Cray Valley to use farnesene as a sustainably-sourced 30% replacement for piperylene and add Wingtack EXTRA F30 to its product line of tackifiers while maintaining solid performance, particularly for use in hot melt and hot melt pressure sensitive adhesives. Cray Valley will showcase this new technology and its product line at the Adhesive and Sealant Council Conference and Expo.

The disruptive nature of Amyris’s farnesene has enabled Cray Valley to create new tackifying resins that are based on monomers from sustainable biomaterials. As a result, these farnesene-based resins are not subject to the cost and supply instabilities of petroleum-based monomers or the typical natural variabilities that affect the quality of pinene and limonene monomers.

“We are pleased to support Cray Valley in the launch of new tackifiers with excellent performance characteristics that support growth in sustainably produced resin products for the large global market for these applications,” said John Melo, President & CEO of Amyris.

The Biofene backstory

Amyris’s sugar cane-derived Biofene forms the basis for a wide range of products varying from specialty products such as cosmetics, perfumes, detergents and industrial lubricants, to transportation fuels such as diesel and jet fuel. As a tailor made pure hydrocarbon it provides numerous advantages when compared to petroleum-based oils and chemicals and is renewable, contributing to a sustainable future.

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.

April 01, 2017

White House Reveals Its Own Fake News

Almost Everyone Believed It

by Tom Konrad, Ph.D., CFA

Spicer
Press Secretary Sean Spicer reveals the joke.

This morning, White House Press Secretary Sean Spicer began an epic five-hour press conference with a one-word statement from President Donald Trump:  "Bazinga!"

Spicer then launched into a detailed explanation of how the President (with help from many Republicans and conservative think-and-humor-tanks) had convinced the nation and the world how he did not believe in climate change.  In fact, efforts to roll back EPA regulations like the Clean Power Plan, CAFE gas mileage standards, and the Paris Agreement were all "fake news."

Over the course of the diatribe, Spicer became increasingly animated, gloating at the number of impossible, if not downright insane political stances and opinions he had persuaded the press to swallow hook, line and sinker. 

"In addition to a great sense of humor, President Trump is widely acknowledged to have a great mind. In fact, many people have said that he is the greatest intellect to ever occupy the White House.  His ability to get you morons to buy his the anti-science conspiracy theory rhetoric would leave you all in awe if you only had the brains to appreciate it!"

Asked about the appointment of Scott Pruitt to head the Environmental Protection Agency, which he had made a career of suing as Oklahoma's attorney general, Spicer smirked and said that Secretary Pruitt had been in on the joke from the beginning, and his legal actions were all part of the prank.  Likewise, Donald Trump's recent executive orders reversing the Obama administration's actions would all be found to have the word "NOT!" written in an organic, citrus-based invisible ink developed by the CIA.  The hidden word could be revealed by gently exposing the paper to heat from one of the old style wasteful incandescent light bulbs or a hair dryer.

Spicer concluded the briefing by saying the nation should stay tuned for an as-yet unidentified but "very big-league" solution to climate change, which President Trump would implement over the course of the following week.  The administration would also be applying to the Guinness organization for recognition of the best April Fools' prank ever.

Environmentalists Not Amused

Refusing to see the humor, Sierra Club executive director Michael Brune said in a statement, "The climate crisis is an extremely serious issue for all Americans in both red and blue states.  There is no time for joking around when we should be using clean energy technology to create jobs while safeguarding our air and water."

World Resources Institute president Andrew Steer said the Trump administration's joke was “like a fraternity prank that had gotten out of hand.” Despite his reservations about the humor, he admitted that he was excited that the President had turned his prodigious intellect to the problem of climate change, and that there would soon be no need for environmentalists. 

Steer said he looked forward to closing WRI and finding more productive work.  He said he was particularly interested in the many high paying jobs picking California produce now that such jobs would no longer be monopolized by illegal immigrants.

Asking not to be identified, another prominent environmentalist said he could see the humor in Trump's jokes about women's bodies, blacks, Mexicans, and queers, but joking about climate change "has the potential to hurt rich, white, straight men."  He said some things are just not to be joked about.

UPDATE: President Trump replied to the last quote via Twitter.  He tweeted, "No one cares more about rich, white, straight man than I do!"  We assume he was serious.

March 19, 2017

Ten Clean Energy Stocks For 2017: Earnings Season

Tom Konrad Ph.D., CFA

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

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

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

Detailed performance is shown in the chart below:

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

Stock discussion

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

Income Stocks

Pattern Energy Group (NASD:PEGI)

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

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

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

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

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

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

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

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

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

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

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

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI)
.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Income Stocks

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

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

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

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

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

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

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

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

Growth Stocks

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

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

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

Aspen Aerogels (NYSE:ASPN)

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

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

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

Final Thoughts

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

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

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

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




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