October 13, 2014

Earth to Cellulosic Ethanol: Glad You’re Here, What Took So Long?

Jim Lane 

Part II of II

Cellulosic ethanol arrives at scale — “The five years away forever” put to rest — but are there troubling waters still ahead? For whom, and why?

There’s a gigantic disconnect between two sections in the country as to whether the United States should be celebrating the success or the failure of cellulosic biofuels. Supporters and detractors alike saying that the wave of commercial-scale cellulosic ethanol refineries is a new wave in technology or the latest round in a wave of unimportant hype.

We looked at the supporters, the detractors, the problems of targets, the Projection Problem, optimistic timelines — and the question of whether targets were “juiced” - in part I, here.

Which brings us to the problem of financing. As we’ll continue in PART II of this special report.

The smoking gun: the failed loan guarantee program for cellulosics

Beta Renewables_Cellulosic Ethanol Deliveries_3

No one ever, ever thought that cellulosic fuels would get off the ground without a loan guarantee program. First-of-kind technologies are simply too risky for conventional project finance lenders and costs — and credit-card interest rates made the projects not economically viable.

So, DOE-backed projects — into which DOE would have extraordinary oversight and insight — weresupposed to have access to DOE-backed loan guarantees for their first commercial projects — which theoretically would allow them to zero out the project risk to the lender and allow them to tap conventional project finance at conventional interest rates — something like 4-7 percent. After the first commercial, the technology risk would be eliminated, and the companies could tap conventional project finance on their own — so went the theory.

Did DOE get a start on the program? Sure, In fact, it was not authorized under the 2007 EISA Act, one was originally established under the 2005 Energy Policy Act. By 2007, Ethanol Producer was reporting, “The DOE is also developing a loan guarantee program for cellulosic projects as authorized in the Energy Policy Act of 2005.”

As of today, the DOE has only two loan guarantees in its portfolio for this 1703 program — both for nuclear energy.

What happened?

Bottom line, of the 11 projects we outlined, only one received one of those DOE loan guarantees, and that one was not finalized until September 2011 — $132.4M for the Abengoa Bioenergy project. The INEOS New Planet Energy project and Range Fuels (ironically) received USDA loan guarantees. BlueFire has a conditional USDA loan guarantee commitment, but no lender of record yet. The rest of them had to find wealthy corporate backers.

Numerous projects attempted to attract DOE loan guarantees, and no dice.

A house oversight committee found that:

“DOE invested a disproportionate amount of its funds into solar technology leaving taxpayers vulnerable by overemphasizing a single technology. 16 of the 27 1705-backed projects employed solar technology – that represented 80 percent of DOE’s funds.”

And noted that:

“DOE has engaged in a disturbing pattern of suspending the approval of a credible project that adheres to all stated standards, only to later approve massive funding for a project proven to be nowhere nearly as far along in the process as DOE purported. DOE’s favoritism significantly harmed numerous companies that had relied on the promise of 1705 financing. The perception is that DOE actively misleads applicants about the status of their loan application, thereby encouraging these firms to misallocate capital, which has led to financial harm.”

Bottom line, financing woes have been the biggest cause of delay — primarily, the government’s inability to construct the loan guarantee program it knew would be needed for first commercials.

The Abengoa project that received funding was, in fact, the lowest-rated project in the DOE’s entire technology loan portfolio — receiving a CCC rating, which is rated as a “highly-speculative investment”. In fact., Abengoa was exposed to criticism in the House Oversight Report because of the Abengoa Bioenergy loan:

A single Spanish firm, Abengoa, received an aggregate $2.45 billion in loans and loan guarantees plus $818 million in Treasury cash grants.54 This reveals excessive risk and subsidies provided to a single firm via multiple subsidiaries. Abengoa has a credit rating of BB, which is considered Junk, thus making this concentration of investment in one company speculative and highly questionable. Exemplifying the risk DOE took in the case of Abengoa, the company managed to obtain a DOE loan commitment for the lowest rated project across the entire DOE Junk portfolio; Abengoa Bioenergy Biomass of Kansas received an extraordinarily low CCC rating and yet the DOE approved a direct loan to the project.

In a 2011 independent review of loan guarantees ordered by the White House, former Assistant Secretary of the Treasury, Herbert Allison, found:

” A lack of clarity in the lines of authority within the loan program office; A lack of clear guidance regarding DOE’s standard of “reasonable prospect of repayment;” and “A lack of clarity with regard to DOE’s goals and tradeoffs with respect to financial goals versus policy goals”

The crisis of innovative technology financing

The problem of the Loan Guarantee program is that it simultaneously required a “reasonable prospect of repayment” while at the same time focusing, in the language of the Energy Policy Act:

The Secretary may only make loan guarantees under §1703 for projects that employ “new or significantly improved technologies.” DOE’s implementing regulation defines this as an energy technology “that is not a Commercial Technology, and that has either (1) Only recently been developed, discovered, or learned; or (2) Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies in use in the United States. . . .”

Common-sense tells us that energy technology “that is not a Commercial Technology” and has “Only recently been developed, discovered, or learned” or “Involves or constitutes one or more meaningful and important improvements in productivity and value, in comparison to Commercial Technologies” is by definition a first-of-kind project.

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Common-sense also tells us that first-of-kind projects are not going to have “investment-grade” project ratings.

Fitch, the project finance rating agency, in commenting on the DOE’s newest round of loan guarantee funds, noted:

“The DOE will favor projects that may be unable to obtain full commercial financing due to perceived risks accompanying newer technologies. Eligible projects offering a catalytic effect on subsequent projects, which replicate or extend the innovative features of eligible projects, may also be favored. In determining which applicants advance, the DOE will assess whether a project provides a reasonable prospect of repaying all project debt, and whether available capital from all sources will be sufficient to carry out a project. No minimum credit rating is specified for this solicitation.”

‘Projects seeking funding must use new or significantly improved technology,” said Gregory Remec, Senior Director with Fitch’s Global Infrastructure Group.

The repayment problem in the face of feedstock and product price risk

What we are left with is this, that borrowers must provide:

“An analysis demonstrating that, at the time of the Application, there is a reasonable prospect that Borrower will be able to repay the Guaranteed Obligations (including interest) according to their terms, and a complete description of the operational and financial assumptions and methodologies on which this demonstration is based.”

Which isn’t much. The definition of “reasonability” is critical in the case of first-of-kind technologies, and was left so entirely vague that a DOE Loan Programs officer could rightly determine that repayment prospects could and should be entirely based on a Fitch rating where feedstock and commodity market risk would be heaped on biofuels — vs, say wind or solar that have free feedstock and fixed power contracts with utilities — and that left the financing of cellulosic biofuels in the lurch.

The First Lien Problem

Another critical failure in the Loan Guarantee program. Despite no specific language requiring this in the Energy Policy Act of 2005, the DOE Loan Program rules specified that:

‘‘[t]he [guaranteed] obligation shall be subject to the condition that the obligation is not subordinate to other financing.’ and that ‘‘[t]he rights of the Secretary, with respect to any property acquired pursuant to a guarantee or related agreements, shall be superior to the rights of any other person with respect to the property.’’

What does that mean, exactly? Comes down to interpretation. In this case, in 2007 DOE issued a final rule implementing Title XVII, and issued regulations which requiring a first lien security interest in all project assets as an incident to making a guarantee.

Now, if you’ve tried to get a home loan, and had a parent or relative guarantee the loan, you know that the guarantor is not going to wrest the first lien away from the bank. The bank remains first in line with a right to foreclose. It was a non-starter for many projects, all across the energy spectrum.

It was bad news for energy projects. As DOE itself reflected in late 2009, “nowhere does section 1702 itself require that the Secretary receive a first lien on all project assets as a condition of his ability to make a loan guarantee. Instead the statute requires only that the Secretary’s guaranteed obligation ‘‘not be subordinate to other financing.’’ In fact, section 1702 does not require that the lender or the Secretary receive any collateral as a statutory requirement for making a loan guarantee.

DOE reexamined the statute, particularly its text and structure, and now concludes that “A first lien on all project assets is better understood as one element that the Secretary may require for a particular project, but is not compelled by the statute to require,” and amended its rules. Pushing back the start date for many projects by almost four years.

Now, keep in mind that cellulosic targets were set to commence in 2011, just 13 months after the clarifications on the 1703 loan guarantee program. And the rules for the cellulosic provisions of RFS2 itself — the critical rules that would underpin any efforts commercially to build capacity to meet of those targets — were finalized by EPA in early 2010.

The impact of the rule problems

All this unsophisticated hoo-hah about “missed targets”. And, also, companies put the extra time to good use in developing more cost-effective technology and logistic operations. So, in the long-term the delay produced better technologies and more of them.

So — that’s the technology — but what about market access?

E10 saturation

One thing that supporters and detractors can agree on is that, in the United States, E10 (10 percent ethanol blends) have reached a saturation point, with around 13.5 billion gallons of ethanol blended into roughly 135 billion gallons of gasoline. The overwhelming majority of that fuel is corn ethanol — which has advantages in cost and availability over cellulosic fuels.

Ethanol vs gasoline, which costs less?

Today, in fact, on an energy basis, ethanol is so cheap that what was once a subsidized fuel — and criticized as such in some quarters — is right at parity with gasoline on an energy basis. As GasBuddy.com pointed out here, ethanol-free gasoline costs 10-15 cents more per gallon than E10 unleaded.

And there’s good reason for that. November ethanol futures were trading at $1.59 on the Chicago Board of trade, while the November RBOB gasoline contract was trading at $2.30. RBOB is blended with 10% ethanol content to make 87-octane regular unleaded fuel — with ethanol supplying an extra boost of octane.

What’s the market access debate over now?

Most of the debate focuses on where fuels go, past the E10 saturation point. That’s not the base for biodiesel or drop-in fuels — but for first-generation and cellulosic ethanol, and for obligated blenders, it’s the big issue on the table.

One option is E15 blending, which is now EPA-approved for vehicles made in 2001 or later. But adoption rates have been cruelly slow — a handful of outlets offer E15. Opinions differ on whether that reflects petroleum industry influence or retailer resistance.

Another option is E85, which is very cost effective for consumers, but it is only available at fewer than 3,000 fuel stations (out of 150,000 nationally), mostly in the Midwest. Retailers balk at the cost of retrofitting for E85 without government help — and in general E85 is marked up way higher at retail than the market will bear. We reported on that here.

Bottom line, there’s no clear path for added ethanol capacity to reach a market at the moment. And corn ethanol is going to be more cost competitive right now. With corn trading at $3.41 per bushel for the December contract, there’s a notional cost of $0.78 per gallon for the corn feedstock right now (even without considering renewable fuel credit values – RINs) — and that’s impossible for cellulosic fuel to compete with right now.

Which puts a brake on financing until the market access picture clears up.

E85 vs gasoline, which costs less?

On a wholesale basis, E85 wins. It’s priced as low as $1.39, wholesale, if you avoid buying it from petroleum companies. That’s a savings of 32 cents per gallon, vs RBOB gasoline, after allowing for differences in energy density.

The Bottom Line

The technologies were hamstrung by a combination of:

1. Overly optimistic views of construction and development timelines from pilot to demonstration, to first commercial, to steady-state operations at scale, to the multiple facility scale. The project developers point out that they are creating several new industries, from scratch (e.g. in many cases, biomass harvesting, pre-treatment, cellulosic hydrolysis, and fermentation) and there is much to be considered in the fact that they did what they said they’d do, in greater numbers, only later.

2. Unlucky timing in terms of the 2008-09 financing crisis and the shutdown of project finance markets.

3. No emergence of consensus on how to deal with the E10 saturation point — which accelerated in the face of falling gasoline demand.

4. Poor structure of loan guarantee program, in a way that virtually shut out liquid transportation fuels, even though they were the primary focus of “ending the oil addiction” and the 2005 and 2007 energy policy legislation.

In the short-term, much of the excitement of their arrival, in the general public view — has been dampened by the exhaustive timeline of the journey. Many in the public have moved on, to electrics, cheap natural gas, or to taking more selfies.

In the long-term, the market access problem looms large. Unless that is solved — perhaps through confrontation, perhaps through confrontation — this wave of cellulosic ethanol technologies will not be joined by a second wave, at least in the United States. Asia and Latin America have become the most likely candidates for deployment now.


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.

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Oil and Gas




October 12, 2014

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

by Debra Fiakas CFA

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

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

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

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

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

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Solar Wind Energy (SWET) is included in the Wind Group of Crystal Equity Research’s Electric Earth Index of company exploiting earth’s natural formations to create energy.

October 11, 2014

Politics and Debt Rain On Chinese Solar

Doug Young

The solar power sector has become a highly volatile place these days, with company stocks rallying one week on upbeat news, only to tumble days later on more downbeat signals. Much of the volatility owes to 2 factors that have created big uncertainty: protectionism and doubts about funding for many new power plants now being announced. Both of those factors are at play in a new string of downbeat news on industry lead Canadian Solar (Nasdaq: CSIQ), as well as struggling Chaori Solar (Shenzhen: 002506) and the now defunct former superstar Suntech.

Of these 3 companies, only Canadian Solar is currently a serious player, though it is seeing early trouble signs in the important Japan market. Suntech has been mostly liquidated after being forced into bankruptcy last year. But ghosts from its past continue to haunt the company, with word that Suntech is being sued by a former customer. Chaori is also undergoing its own painful reorganization after defaulting on a domestic bond earlier this year, and the latest reports say that debt holders will end up losing most of their money.

Let’s begin with Canadian Solar, which has just announced that some of its projects in Japan are now running into problems after the government stopped approving connection of new solar power plants to the national grid. (company announcement) Japan has become a major bright spot for many Chinese solar panel makers over the last year, as that country tries to wean itself from reliance on nuclear power following a major disaster in 2011.

Canadian Solar now has 500 megawatts in late-stage projects in Japan, and aims to increase that by up to 20 percent by the end of this year. The Japanese government’s suspension of new approvals has affected Canadian Solar’s projects with about 135 megawatts of combined capacity, though the company said it expects to win eventual approval of the projects and sees no near-term impact on its sales.

I’m no expert on Japanese politics, but I do expect that these affected projects should eventually win approval since the country is under a lot of pressure to develop safer power sources. Still, I’ve also heard that protectionist forces may be growing, as Tokyo tries to promote domestic panel manufacturers. If that’s the case, politics could place a damper on future sales to Japan by Canadian Solar and other Chinese solar panel makers.

Next let’s look at the other 2 cases, starting with word that Suntech is being sued by a former customer named ZKenergy for failing to deliver 206 million yuan ($33.5 million) worth of solar panels. (company announcement) In this case the amount isn’t huge, but it could cause problems for Hong Kong-listed Shunfeng Photovoltaic (HKEx: 1165), which acquired Suntech’s manufacturing assets during the bankruptcy liquidation.

Shunfeng is already reeling from bad news 2 weeks ago, when media reported a 500 million yuan, 130 megawatt solar farm being built with the company’s panels had run into trouble. (previous post) Shuntech shares have fallen sharply since that report, and the stock could see more turmoil if other former Suntech customers start stepping forward with similar lawsuits.

Lastly there’s Chaori, which made headlines early this year when it became the first company in modern history to default on a Chinese domestic bond offering. Other struggling solar panel makers like Suntech had previously defaulted on bonds, but all of those were dollar-denominated and sold to more sophisticated international investors.

According to the latest report, Chaori is working on an agreement with its bond holders that could see them ultimately recoup as little as 20 percent of their original investment. (English article) Such payouts aren’t that unusual for this kind of default, and Suntech bondholders probably received similar rates. But the figures do underscore the ongoing risk for solar investors, as the industry continues to clean up after its prolonged downturn that saw many mid-sized and smaller firms go out of business.

Bottom line: A new report from Canadian Solar indicates politics could dampen Chinese panel maker sales in Japan, while separate reports indicate heavy debt continues to plague the sector.

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

October 10, 2014

Two New Reasons to Buy SolarCity

By Jeff Siegel

DISCLOSURE: Long SCTY.

SolarCity truck Well, SolarCity's (NASDAQ:SCTY) latest news probably won't be enough to silence the bears and scare off shorty, but it has stopped the bleeding a bit.

After falling more than 25% over the past month, SCTY has stabilized after announcing a new loan program that will allow customers to buy a solar energy system outright instead of leasing a system.

Thanks to the company's massive scale and low cost of capital, SCTY will now lend directly to customers. This is a huge advantage over having customers seek out loans provided by third-party banks. And as far as I know, no other installer offers such an option.

Users of the company's new loan program, called MyPower, will also still benefit from SolarCity's 30-year warranties, production guarantees and monitoring services.

Bank of America analyst Krish Sankar chimed in on the news today, reiterating his buy rating and $95 price target on the stock. Of course Sankar also noted that the loan product was expected.

In any event, SCTY is still going to be a roller coaster ride throughout the rest of the year. Many of those who bought at the top are likely going to sell in an effort to offset capital gains liabilities for 2014. But folks like me, who bought in on the dip and see the long-term potential of SCTY will hold tight, and maybe even pick up more while the stock is still relatively cheap.

Also worth noting today is the recently renewed partnership between SolarCity and Honda (NYSE:HMC) to finance $50 million in new solar projects for Honda and Acura customers and dealerships in the U.S.

This is actually a pretty big deal, but the news is getting overshadowed by SCTY's new loan announcement.

Nevertheless, I remain bullish on SCTY and see any major dips below $70 as a buying opportunity.

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

October 09, 2014

Do Falling Alternative Energy Funds Returns Signal Danger?

By Harris Roen

Green Mutual Fund Returns Falter

Returns for green mutual funds have slid as of late. Longer term, however, alternative energy MFs are still showing strong gains. All MFs are in positive territory for the past 12 months, and 6 out of 14 funds are up double digits. Three year returns have faired even better, showing an annualized return of 14.3% on average.

Short term, however, almost all the funds have given up a significant amount of their recent gains. For example, Firsthand Alternative Energy (ALTEX), the MF with the best one-year returns, gave up 6.1% of its gains in September. In fact all MFs are trading down in the past month, and 11 out of 14 funds are in the red for the past quarter…

Alternative Energy Mutual Fund Returns

Alternative Energy ETFs Lower Gains

Alternative energy ETFs are down substantially from the levels they were at earlier this year. ETFs are up over 9% on average in 12 months, but this is much below the 28% average gains ETFs had in June, and the 65% average annual returns ETFs were seeing in November 2013. All ETFs are down for the month, and 15 out of 17 show losses for the quarter.

The ETF with the best one-year return is Guggenheim Solar (TAN), up over 30% in the past 12 months. This is not surprising, considering TAN holds many high-flying solar stocks, including SolarCity (SCTY), Enphase Energy (ENPH) and SunPower (SPWR)…

Alternative Energy ETF Returns


DISCLOSURE

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

About the author

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

October 08, 2014

Investing In Water Desalination

By Jeff Siegel

The million-dollar manicured lawns of Montecito, CA have withered, died, and gone to seed.

The polo fields are little more than dust now, and many have traded the good china for paper plates so as to avoid using the dishwasher.

There’s no doubt about it — Mother Nature doesn’t care if you’re rich or poor, black or white, fat or skinny. When she lays the smack down, we all feel it. And there is no better example of this than the debilitating drought that’s wringing the Golden State dry.

Of course, for those who can afford it, it’s not all doom and gloom.

Turns out the richest one percent in one of the wealthiest California zip codes is battling the drought with fat wads of cash.

While the “regular people” are forced to deal with the first-world problems of dry lawns and unwashed cars, the big money of Montecito is having its liquid gold trucked in from other regions. Exact locations are still a bit of a mystery.

Of course, trucking in all that water isn't cheap. One unit of water (748 gallons), which used to cost less than seven bucks, will run you up to $80 now. Still, when you consider what it takes to collect, maintain, clean, and deliver that water, $80 isn't really all that much.

No More Golf Courses

One of the reasons the Southwest is having so much difficulty with the drought is not necessarily because of climate change, but because of the lack of a real free market for water.

If folks in the American desert had to pay a price that directly correlated with the cost of bringing fresh water to those regions — regions where it doesn't really belong to begin with — they would be paying a lot more and wasting a lot less.

I suspect that at $80 a unit, there would be far fewer grassy lawns in Phoenix and certainly not as many public golf courses in Palm Springs. As well, the agricultural communities in those regions would all be on drip irrigation, every home would be equipped with rain barrels, and waterless urinals would be found in every single mall, restaurant, and government building from Santa Cruz to San Antonio.

The bottom line is that while we all swoon over oil and gold, it's rare to find folks, particularly investors, who understand just how valuable water is.

Truth is, pitching water investment opportunities has never been easy. Most investors find it to be a boring subject, and unless there's a drought, no one's really interested. Hell, even when there is a drought, few seem to care.

But the way I see it, if you're looking for a steady, long-term investment opportunity, there's one sector you should be drooling over: desalination.

Making Out With Salma Hayek

Now, I'll be perfectly honest: I don't think desalination in the United States is a pressing issue. Or rather, it wouldn't have to be a pressing issue if we just used water a little more responsibly.

But I'm a realist, and I know that asking Americans to responsibly use water is like me asking Salma Hayek to make out. I can make the request, but it's not going to happen.

So instead of lamenting rejections, we should capitalize on them. And when it comes to water scarcity, a great way to do that is by tapping the desalination sector. After all, the most recent data suggests the global desalination market will enjoy an 8.9% CAGR from 2013 to 2018. Not bad.

As a side note, desalination is actually a pretty expensive adventure. A recently approved desalination plant in San Diego will cost $922 million (and I'm sure it'll creep up closer to $1 billion after cost overruns), and that'll provide the city with 7% of its drinking water.

In any event, you still have to strike while the iron's hot. And in a world of scarce water resources, desalination is scorching.

Get Exposed

Most of the bigger plays in desalination are not pure plays. I'm talking about companies like GE (NYSE: GE), Veolia Environment (NYSE: VE), and Acciona (OTC: ACXIF).

If you're looking for more of pure play, there's Consolidated Water Co. (NASDAQ: CWCO), which builds and operates desalination plants and water distribution systems throughout the Caribbean. There's also Tetra Tech (NASDAQ: TTEK), which, while not a pure play, is a solid player in the water space and also builds desalination plants in the United States.  Finally, there's Energy Recovery, Inc. (NASDAQ: ERII), which sells energy recovery devices used in desalination and other high pressure industrial processes.

Of course, you can also get some exposure to water and water infrastructure through water ETFs, such as the Guggenheim S&P Global Water ETF (NYSE: CGW), First Trust ISE Water ETF (NYSE: FIW), and the PowerShares Water Resources ETF (NYSE: PHO).

Now, for the record, I'm not telling you to drop everything and load up the boat with desalination plays and water ETFs. Just gain a little exposure here, because the truth is, severe droughts are likely going to be a regular occurrence for years to come. Might as well take advantage of the situation.

After all, it may not be long before you'll have to shell out $80 for 748 gallons of water, too.

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

October 07, 2014

Waste Management: Biogas with a Dividend

by Debra Fiakas CFA

The biogas industry has attracted a number of new entrants.  Blue Sphere (BLSP:  OTCQB) described in the recent post “Turning Potato Peels to Power” and RDX Technologies (RDX: TO, described here) are both newcomers to the biogas power generation.  Both companies show much promise and will likely grow dramatically over the next few years.  Shareholders are counting on the stock prices to follow.
Landfill+Methane[1].jpg
Investors who are less interested in the big growth play and more interested in stability and current income are not left out.  There are larger, more established companies in the waste-to-energy market.  Covanta Holding (CVA: NYSE), which was discussed on the post “Big Player in Waste-to-Energy”, is one of them.  Its dividend yield is enticing and the stock has a very modest volatility as measured by beta of 0.10.  However, I concluded that Covanta is overbought.  The stock trades at a multiple of 35.3 times 2015 earnings, well above the average for the S&P 500 Index.
 
Fortunately, there are other choices for yield-hungry investors.  Like Covanta, Waste Management, Inc. (WM:  NYSE) got into the waste-to-energy business as a collector of wastes.  Based in Texas, the company operates a fleet of waste collection trucks and routes for municipal, commercial and residential customers.  While Waste Management still carts waste the landfills it owns, much of the waste is now sent through recycling and recovery processes to reclaim metals and extract energy from both organic materials.
 
Unlike Covanta that has been willing to own and operate, Waste Management has kept to what it knows best, waste collection and handling.  Instead Waste Management has used joint ventures to dip its toe into the waste-to-energy field. In March 2014, Waste Management announced a team-up with Ventech Engineers International, NRG Energy (NRG:  NYSE) and Velocys Plc (VLS:  LSE) to produce renewable fuel from methane gas coming from landfills.  Ventech and NRG will provide engineering and project management functions, while Velocys brings the gas-to-liquids technologies to the table.  Waste Management just has to keep the waste coming and make gas from its landfills available for processing.

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

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

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

October 06, 2014

Ten Clean Energy Stocks For 2014: September Swoon

Tom Konrad CFA

Worries including the conflict with ISIL, Ebola, and economic slow-down in Europe, sent the stock market down in the month to October 3rd, with small cap stocks and clean energy stocks falling even farther than the large cap S&P 500.  My 10 Clean Energy Stocks for 2014 model portfolio weathered the storm relatively well because of its emphasis on defensive and income stocks. 

Since the last update, the model portfolio was down 4.8%, compared to 5.5% for small cap stocks (as measured by the Russell 2000 index ETF, IWM) and a 9.8% decline for clean energy stocks, as measured by PBW, the Powershares Wilderhill Clean Energy Index.  The relative strength of the model portfolio was in spite of significant weakness in foreign currencies.  The Canadian Dollar, Euro, and South African Rand fell 3.3%, 3.4%, and 5.8% for the month, dragging the model portfolio down 2.8% more in US Dollar terms than in local currency terms.

Since portfolio inception on December 26th, 2013, the model portfolio is up 1.5% in dollar terms, and 3.8% in local currency terms.  The small cap stock index was down 3.9%, while the clean energy stock index eked out a tiny gain of 0.3%.

indexes chart
Stock market trends down in September. Image source Yahoo! Finance.

Individual Stock Notes

The chart and discussion detail the performance of individual stocks in the 10 Clean Energy Stocks for 2014 model portfolio, along with relevant news items since the last update.
10 for 14 - October 3 2014


(Current prices as of August 5th, 2014.  The "High Target" and "Low Target" represent my December predictions of the ranges within which these stocks would end the year, barring extraordinary events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/26/2013 Price: $13.85.     Low Target: $13.  High Target: $16.  Annualized Dividend: $0.88.
Current Price: $13.77.  YTD Total US$ Return: 4.2

Sustainable Infrastructure REIT Hannon Armstrong paid its regular $0.22 dividend for the third quarter.  The REIT has a goal of paying dividends equal to 100% of distributable income, which were $0.20 in the first quarter, and $0.22 in the second quarter.  I expect third and fourth quarter distributable income to be sequentially higher as the company deploys capital from its $75 million April secondary offering.  This implies that we can expect a small increase in December's fourth quarter dividend, which I expect to be approximately $0.24.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
12/26/2013 Price: C$4.85.   Low Target: C$4.  High Target: C$6. 
Annualized Dividend: C$0.24.
Current Price: C$4.32. YTD Total C$ Return: -7.2%.  YTD Total US$ Return: -11.7%

Green building company PFB re-authorized its normal course issuer bid to purchase up to 50,000 shares of its own stock over the next year.  Over the past year, the company repurchased 19,500 of its shares at an average price of C$4.92.  Given the current price of C$4.32, I would expect it to step up these purchases.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF)
.

12/26/2013 Price: C$4.44.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.21.  YTD Total C$ Return: 27.0%.  YTD Total US$ Return: 20.9%

Independent power producer Capstone Infrastructure announced strong second quarter operating results based on higher wind production and increased income from its British water utility, Bristol Water. The results were generally in line with analysts' forecasts, but Scotiabank increased its price target for the company to C$4.50 from C$4.00 while keeping its "Market Perform" rating.  

Last week, Capstone closed C$76 million financing for its 25 MW Goulais wind farm which is under construction in Northern Ontario.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
12/26/2013 Price: C$4.93.   Low Target: C$4.  High Target: C$7. 
Annualized Dividend: US$0.28. 
Current Price: C$5.54.  YTD Total C$ Return: 16.7% .  YTD Total US$ Return: 11.1%

Waste heat recovery firm Primary Energy Recycling did not release any significant news since the last update.

5. Accell Group (Amsterdam:ACC [formerly ACCEL], OTC:ACGPF).
 
12/26/2013 Price: €13.59.  Annual Dividend €0.55 Low Target: 11.5.  High Target: €18.
Current Price: €12.99. YTD Total  Return: -0.04% .  YTD Total US$ Return: -9.2% 

Bicycle manufacturer and distributor Accell Group continued to decline because of worries about the European economy and the declining Euro.  I think the current weakness is leading to an excellent buying opportunity, especially since the company has been diversifying its revenue geographically with a significant push into the United States.  The company signed a deal with US sports and outdoors retailer REI to distribute its Ghost bikes in the US, and E-bikes, one of Accell's strengths, seem to be accelerating on this side of the Atlantic.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/26/2013 Price: C$10.57.  Low Target: C$8.  High Target: C$16. 
Annualized Dividend: C$0.585.
Current Price: C$13.23.  YTD Total C$ Return: 29.3% .  YTD Total US$ Return: 23.1%.

Leading transit bus manufacturer New Flyer paid its regular monthly dividend of C$0.0475 but did not release any significant news.

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64Low Target: $8.  High Target: $16.  No Dividend.
Current Price: $4.44  YTD Total US$ Return: -22.8%.

The stock of energy performance contracting firm Ameresco fell in sympathy with other small cap stocks, reversing gains from the previous month.  I continue to think AMRC presents an excellent buying opportunity at the current price.

8. Power REIT (NYSE:PW). 
12/26/2013 Price: $8.42Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $10.12 YTD Total US$ Return: 20.2%

Solar and rail real estate investment trust Power REIT advanced strongly during the month.  Norfolk Southern Corp. (NYSE:NSC) and its subleasee Wheeling & Lake Erie Railway filed motions for summary judgment in the civil case in which they are trying to prevent Power REIT from foreclosing on their lease of 112 miles of track from a Power REIT subsidiary.  Power REIT also filed a motion for summary judgment, and both motions (along with many other court documents in the case can be found on the Power REIT website.

The stock action seems to imply that some investors expect that something of substance may come out of the summary judgment, or from the mediation which the parties have entered into at the Court's urging.  The parties are extremely far apart in the case, and so there remains a good chance of going to trial in early 2015.  In any case, the judge seems to be pushing for as quick a resolution as possible, which gives shareholders good reason to believe that the case will come to some sort of conclusion in months rather than years.

9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price: $12.17Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $8.93. YTD Total ZAR Return: -19.3%. YTD Total US$ Return: -26.6%

Global provider of software as a service fleet and mobile asset management, MiX Telematics stock decline for the month was entirely due to the declining South African Rand.  The was not any significant news about the company, but a good, in-depth article on the company appeared on Seeking Alpha with the thesis that the stock is near a bottom.  Note that Seeking Alpha Pro articles are only available for free for a month, so if you plan to read the linked article, you should do so in the next week.  The author provided excellent background and detail about the company.

[Note: I've reversed the order of Power REIT and MiX Telematics in the chart above in order to group the two growth stocks (MIXT and AMRC) together.]

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
12/26/2013 Price: C$0.28. Low Target: C$0.20.  High Target: C$0.60. No Dividend.
Current Price: C$0.31   YTD Total C$ Return: 10.7% .  YTD Total US$ Return: 5.4%.

Renewable energy developer and operator Alterra Power acquired ownership of 684 thousand shares of Greenbriar Capital Corp (TSXV:GRB) and a similar number of warrants in payment for a US$1 million debt owed to Alterra as the result of a previously terminated joint venture.

Two Speculative Clean Energy Penny Stocks for 2014

Ram Power Corp (TSX:RPG, OTC:RAMPF)
12/26/2013 Price: C$0.08.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.015   YTD Total C$ Return: -81.3% .  YTD Total US$ Return: -82.1%
Terminal US$ Return -57% (when I said to sell on June 3rd.)

Geothermal power developer Ram Power's stock fell further in very active trading.  The decision to take our losses in June continues to look like a good one. 

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
12/26/2013 Price: C$0.075.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.14   YTD Total C$ Return: 86.7% .  YTD Total US$ Return: 77.7%.

Wind project developer Finavera held its annual general meeting (AGM), but did not release more details about its plan to purchase California residential solar installation marketing firm Solar Alliance of America prior to the meeting.  I checked in with CEO Jason Bak by email on September 18th, and this is what he had to say about the meeting:

We couldn’t publish anything in advance of the AGM because of the stage of DD [due diligence] that we’re at – I don’t feel confident presenting accounts or projections until the audit in complete (ETA end of [September]).  We did however, discuss the opportunity with shareholders at the meeting and had a vote on a motion from the floor for the approval of the acquisition, based on the successful completion of DD and the approval of the stock exchange.   The resolution passed with ~85% approval of approximately 12MM shares voting (~32% of shareholders, which is a good turn out).
 
I will be putting out a company update on the transaction shortly.  Things are progressing well and the projections look impressive, though they are continuing to be refined.

I have not seen the promised press release about the annual meeting or any more details on the the results of due diligence.  Given Bak's track record, it would have been surpising if the press release about the AGM had materialized.  It's also likely that he was being overly optimistic about how long the due diligence would take.  I expect that the timeline for the deal to buy Solar Alliance will also slip significantly before it closes.

Conclusion

The recent declines in a number of clean energy stocks are creating buying opportunities.  In this list, I think Accell, Ameresco, MiX and PFB are currently very attractive. I'm also seeing buying opportunities elsewhere in the sector, such as biodiesel producer FutureFuel Corp (NYSE:FF), which I recently wrote about here.

Disclosure: Long HASI, PFB, CSE, ACC, NFI, PRI, AMRC, MIXT, PW, AXY, FVR, FF.  

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

October 05, 2014

FutureFuel, Present Buying Opportunity

Tom Konrad CFA

FutureFuel Corp. (NYSE:FF) manufactures chemicals, biofuels (mostly biodiesel), and other biobased products.  About 60% of revenues have historically come from the Chemicals unit, with the balance of 40% coming from the Biodiesel unit. Both units saw sharp declines in revenues over the last two quarters for reasons that seem likely to be temporary (at least in part.)  The stock has sold off sharply as a result, falling from the $18-$21 range this spring to its $12 recent price

Biodiesel

The entire biodiesel industry has been suffering from the expiration of the biodiesel blender's tax credit and the long-delayed release of the EPA's renewables fuels requirements. For the first time since they went into effect in 2007, the EPA proposed to cut the amount of biofuel that oil refiners must blend into their products, known as the Renewable Volume Obligations (RVO).  The ensuing controversy (with biofuels producers arguing against cuts against strong oil industry opposition) has led the EPA to delay the release of the 2014 target. 

According to Jim Lane, Publisher of Biofuels Digest in an interview, the EPA is directed to release the annual RVO by November first of the prior year.  That means that the 2014 RVO are already over 11 months late.  Lane expects them to be released this month.  The other major incentive for biodiesel is the blender's tax credit (BTC), a $1 per gallon credit given to fuel blender for every gallon of biodiesel blended with any amount of petrodiesel.  This credit expired at the end of 2013, and has not been renewed.  Most observers believe that it will not be renewed until the lame-duck session of Congress after the election in November, during which renewal is a possibility.  Past renewals have been retroactive: In 2013, FutureFuel received a $2.5 million benefit from the retroactive reinstatement of the BTC for 2012.

The lack of the BTC and long delay of the RVO have led to a tough climate for both biodiesel producers and blenders.  This is despite several positive developments Lane has observed.  He says the popularity for biodiesel is high, and more and more companies are approving biodiesel blends for use in their vehicles.

Without the incentives, FutureFuel reduced biodiesel production dramatically in the second quarter, as did most biodiesel producers.  This lead to dislocation in the market for biodiesel feedstocks: grease and oils.  Lee Mikles, FutureFuel's President observed in the second quarter conference call:
The feedstock availability is more robust right now than it had been... earlier in the year. You had a lot of feedstocks going offshore, it appeared to us, especially in the grease markets. ... [T]here’s been a big dislocation in the market all of a sudden that has dropped these feedstock prices pretty dramatically. With soy coming down so dramatically, it helps a lot because that’s the easiest feedstock to use if anybody uses it. Typically we don’t because it’s too high priced, but all of a sudden you’ve got this unlocking of feedstocks kind of across the board because everything kind of track soy, more or less. ...

I think there’s big opportunities in the back end of the year if you have the storage to be able to take it, which we do.
With the RVO likely to be released this month, and FutureFuel having been stockpiling cheap feedstock for the last few months, I expect that the fourth quarter will be extremely profitable for FutureFuel's biodiesel business.  Demand will be very high as customers scramble to fulfill their RVO in the last three months of the year.  If the BTC is renewed retroactively during Congress's lame duck session, we will see an added boost to profits in late 2014 or early 2015.

Chemicals

FutureFuel is also a manufacturer of specialty chemicals, and that side of the business has also been suffering.  In this case, the problems have been mostly "self-inflicted," as Mikles described them. 
[W]e are a chemical plant and our efforts to implement new chemical growth has not been what we’d hoped for. We’ve really struggled to bring up a new proprietary herbicide intermediate plant and in executing sales for new customers – not existing, new customers on the laundry detergent additive. These have terrific potential, but we have not delivered on them so far.

In addition, we had hoped to have a refined glycerin plant operating in the second quarter, but we were not able to make that happen. The expectation, though, is that that plant will be ready in the not-too-distant future. The timing of that is really uncertain, but I can say that it is progressing positively at this point.

So we continue to see declines in our larger contracts – that’s not anything new, that’s continued to press forward, but we endeavor to replace that, those reductions, and to build our product portfolio. We do remain optimistic about the future prospects.
While I don't have the expertise to evaluate the future prospects of a chemical plant, this sounds like it should also lead to significant business improvement in the next few quarters. 

Insider Sentiment

When evaluating small companies, I put special weight on management and other insiders putting their own money on the line.  While an insider might sell stock because they need the money for other reasons, the only reason for an insider to buy is because they think the market price undervalues the company's current prospects.

According to SEC filings, insiders were last selling the stock in March, at around $20 a share.  There have been no sales since then, but an Executive Vice President bought 1500 shares at $16 a share in May, and a director bought 5,000 shares at $14 in August.  Since the price is currently $12, I think we can reasonably expect more insider buying after third quarter results are released and insiders are again able to trade the stock.

Conclusion

FutureFuel has two major business segments, and the stock has fallen by almost half since its peaks in March and April.  The EPA's release of the 2014 RVO this month, the possible renewal of the BTC during Congress's lame duck session, and the likely improvements in the company's Chemicals business over the next few quarters all lead me to expect strong increases in the company's profits over the next few quarters.

The current price of $12 seems likely to be a relatively short lived buying opportunity.  The recent downtrend could easily be reversed if the 2014 RVO are higher than most observers expect, or by less dismal than expected third quarter results, when they are released in November.  

Even in the current climate, FutureFuel remains profitable and has a strong balance sheet.  If Federal incentives for biodiesel are removed permanently, the biodiesel industry will survive as feedstock prices fall to reflect the drop in subsidized demand.  If that his the case, FutureFuel will likely be a consolidator, with the opportunity to purchase biodiesel production capacity at pennies on the dollar from its less well-capitalized competitors.

Disclosure: Long FF.

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

October 04, 2014

Turning Potato Peels To Power

by Debra Fiakas CFA

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

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

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

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

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

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

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

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

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

October 03, 2014

Positive Signs For For The Chinese Solar Sector

Doug Young

Just months after tapping financial markets for nearly $250 million, solar panel maker Trina (NYSE: TSL) has just announced another plan to raise a similar amount as it tries to take advantage of improving sentiment towards its sector. Such fund-raising would have been unthinkable as recently as a year ago, when recovery of the solar panel sector was far from certain following a prolonged downturn. In a relatively positive sign, Trina’s latest fund-raising plan didn’t trigger a major sell-off in its shares, indicating investors are more confident of the company’s and the sector’s future prospects.

Meantime in other major solar news, the sector got a nice boost with word that Hong Kong-listed real estate Evergrande (HKEx: 3333) plans to get into the business of solar plant development with a major new investment. That move isn’t hugely surprising, since China’s real estate sector is now on the cusp of a major correction that is likely to crimp demand for the kinds of residential properties that Evergrande develops. In the absence of major new residential development projects, solar power stations looks like an interesting alternative to diversify the company’s business.

Both of these developments are generally positive for the solar sector, reflecting growing momentum for a new wave of solar plant building in China as Beijing offers strong incentives to encourage such construction. I’ve previously been a bit negative on developments so far, which have seen Trina and other solar panel makers personally finance much of the new plant development. But Evergrande’s decision to enter the space could mark the start of a new trend that may see more third-party developers join the movement from the real estate and other sectors where growth is stalling.

All that said, let’s begin with a look at Trina’s latest plan that will see it raise about $200 million through an offering of bonds and new American Depositary Shares (ADSs). The company will raise the money by selling $100 million in senior convertible notes (company announcement), and another 7 million ADSs that could raise more than $90 million based on the company’s latest share price. (company announcement)

The sale would follow a similar exercise that saw Trina raise about $250 million through the issue of convertible notes and ADSs back in June (previous post), bringing its total fund raising over the last 4 months to nearly half a billion dollars. The company joins rivals Canadian Solar (Nasdaq: CSIQ) and Yingli (NYSE: YGE), which have also recently returned to global capital markets after a freeze-out of more than 2 years during a prolonged sector downturn that sent major players Suntech and LDK into bankruptcy.

The most positive thing about Trina’s latest announcement is that it didn’t spark a major sell-off of the company’s shares, which fell just 2.7 percent after the news. That’s a sharp contrast from the June fund-raising announcement, which sparked a much larger drop of nearly 10 percent. Trina’s shares have gained back most of those losses since then, indicating investors are regaining confidence in the sector’s longer term growth prospects.

Meantime, Evergrande is reportedly getting set to enter the solar power development space through plans to invest a whopping 90 billion yuan ($14 billion) in 3 major solar plants over the next 3 years. (Chinese article) The investment figure looks a bit too large to me, though Evergrande does have a history of making exaggerated announcements and it’s also possible the media report isn’t completely accurate.

Regardless of the actual investment, the broader trend does look somewhat encouraging, as it indicates that some major third-party private sector players may be taking an interest in helping to fund Beijing’s ambitious plans to develop China’s solar power sector. We’ll have to wait and see if others from slowing sectors like real estate and steel manufacturing join the trend, which could provide some nice new business for solar panel makers. The big risk is that many of these companies have little or no experience in such development, which could lead to problems in both plant finance and construction.

Bottom line: Trina’s new plan to raise $200 million and Evergrande’s plan to enter solar power development are both positive signs for the sector, reflecting a more sustained return of investor confidence.

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


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