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Gevo Restarts Production

Wed, 19 Jun 2013 09:17:13 -0500

Jim Lane

As Gevo recommences the switchover to bio-based isobutanol at its first commercial plant, we look in-depth at 2012′s contamination issues — and the prospects and path forward.

In Colorado, Gevo, Inc. (NASD:GEVO) announced that it has resumed commercial production of isobutanol at its Luverne, Minn. plant in single train mode, successfully utilizing its proprietary Gevo Integrated Fermentation Technology (GIFT).

“I am pleased to report that we have been successful in operating our full scale fermentation and our GIFT separation system that separates the isobutanol from the fermentation broth. This serves to further validate our technology as we had not previously run the GIFT system at full scale. I can now say that it runs beautifully,” noted Gevo CEO Patrick Gruber.

“We plan to be producing isobutanol and operating throughout the rest of this year, bringing all of our fermenters and GIFT systems online in the third and fourth quarters, testing run rates, then ramping up production and sales in 2013 and 2014” Gruber added.

“We will sell the isobutanol we produce, using it for market development in the specialty chemicals market, in specialty oxygenated fuel blendstocks markets, and as a building block to make fuel products such as jet fuel and chemical products such as paraxylene for polyester used in the production of bottles and fibers.” Isobutanol applications for the specialty chemicals and chemical intermediates sectors include work in paraxylene with Toray (OTC:TRYIF) and Coca-Cola (NYSE:KO).

Let’s look at the 2012 problem – what it was, what it wasn’t. At the end of the day, the problem at Luverne came down to this guy and friends of his — strains of bacillus, a rod-shaped, single-celled bacteria with an insatiable appetite for dextrose, or corn sugars.

Microbial infections are a common feature of world-scale fermentation — especially in their commissioning period — they’re a common nuisance with ethanol plants, also, that have developed antibiotics and other strategies to combat them.

As Gevo CEO Pat Gruber observed, in talking with the Digest, “First step was, for us, to make sure we understood all the competitors that are chewing up the sugar, eating up yield. There’s no way to know until you do it, at scale. What matters is how you respond.”

Bacteria lurk. Picture the small white infection spots you see on a child’s inflamed tonsil when tonsillitis or strep throat strikes — and parents will know that those type of infections can go away and then suddenly strike again. Those are lurking bacteria that have found a happy home, hung up in a tube somewhere inside the body — lying in wait for the right conditions to appear, and then spring back into view.

It is not completely different with microbial contamination in fermentation systems — likewise, the microbes embed themselves in small infection pockets, and then rise up in numbers when the sugars start to flow.

“You are always going to have microbes, whether they come in through the air or water,” said Gruber. “But there is manageable, and then there is outnumbered

In Gevo’s case — given that this is a new system, producing isobutanol instead of ethanol, it was essential to understand the particular cocktail of microbes before designing a remedy. “The fixes included changing the fermentation conditions and related operating parameters,” noted Gruber, “making equipment modifications to improve sanitization, and, most importantly, improving our operating discipline—the procedures we use at the plant.

The House that Ruth Gevo Built

Let’s visit one aspect of Gevo’s changes for a moment. Interestingly, the production yeast microbe itself has not been altered. But the fermentation conditions were changes to ensure that it competes more effectively with whatever other critters get into the soup.

In its own way, not entirely unlike the way that the original (1923) Yankee Stadium, “the House that Ruth Built,” was designed with the Bambino’s batting style in mind. That facility had the “short porch” in right field tailored to Ruth’s left-handed pull swing, leaving big hitters from visiting teams to face 450-foot stretch of center field known as “Death Valley”.

The drought and the corn crisis

The path forward from 2012′s microbial infections might have looked differently if corn prices had not soared following the 2012 drought. The original backup plan for Luverne in the commissioning phase was to return to ethanol production, or to continue to produce isobutanol and work through yield and process improvement. But, as Gruber noted to the Digest, “it’s one thing if corn is $4 or $5. With corn at $7.50 and going to $8, profitable ethanol production was essentially out of the question,” so we decided to pause production last fall after generating the isobutanol we needed for initial market development.

The path to full production

“For now,” Gruber notes, “we are currently operating in single train mode. It is easier to manage one fermenter and one GIFT separation system while we learn how to run the plant at full scale. Also, it is a more efficient use of corn feedstock and we gain valuable operating experience as we go.”

Having said that, one fermenter at Gevo scale is, ahem, not exactly nothing — given that they are operating at million liter scale.

Let’s put that in the context of some other highly-successful paths to scale. Genomatica is operating at around 600,000 liter scale, Solazyme (SZYM) has reached 500,000 liter-scale, and we understand that Amyris (AMRS) is operating at something around 200,000 liter scale at the moment. Each company will find the scale that is right for their process — it is not the case that 500,000 is inevitably better than 200,000 although economies of scale apply.

The point is, operating in single-train mode with a million liter fermenter is akin to operating two at Solazyme scale, or more at Amyris scale.

The expectation is that Gevo will have all of its fermentation units running at scale by year end, and the company continues to aim towards its critical delivery dates in 2015 for its clients.

Redfield, Biofuel Energy and other projects

What about expansion of the Gevo system to Redfield and other plants, such as Biofuel Energy? “too early to say on timeline,” Gruber told the Digest. “The interest is out there. But for now we are going to be fully focused on getting the production optimized at Luverne.”

What about cellulosic sugars? For sure, Gevo has noted that companies like Sweetwater are landing deals with ethanol plants to bring cellulosic sugars into their production streams. “We can work with cellulosic sugars, for sure” said Gruber, “but our cellulosic is not ready for prime time.”

The Gevo-Butamax dispute

Next stop in the never ending battle between Gevo and Butamax over their respective patents is an August trial date over the ’375 Gevo patent, relating back to the use of a specific gene that has been knocked out to ensure high production rates for isobutanol. This is a Gevo suit against Butamax — there remains pending litigation on appeal relating to Butamax suits against Gevo for infringement on Butamax patents.

And the efforts to invalidate each others patents go on, as well. And on. And on.

The Bottom Line

It’s good news across the industry that Gevo is back to isobutanol production — and there are no voices amongst the Digesterati indicating that a slow-and-steady approach to having all the fermenters online before year end is a bad idea.

Items to watch? The August trial on Gevo’s patents. Corn prices, generally. A steady progress between now and end-of-year to having all the fermenters online. For the longer term, announcements on the Redfield second commercial facility, and progress with cellulosic sugars.

Disclosure: None.

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

Japanese Solar Manufacturers Get Their Groove Back

Tue, 18 Jun 2013 08:47:31 -0500

Junko Movellan

The Skies are Brightening as Manufacturers Resume Spending to Improve Efficiency

Almost one decade ago, Japanese PV makers dominated global PV production — Sharp (SHCAY), Kyocera (KYO), Sanyo (now part of Panasonic) and Mitsubishi Electric represented about 50 percent of global production in 2005. When German and other European markets expanded quickly, a great number of companies in Europe and Asia, specifically China, jumped into the “potentially” profitable PV industry. They rapidly ramped up their production and brought down costs, leaving Japanese companies behind.

When the Japanese government decided to pump life into the lagging domestic PV market, it created a generous feed-in tariff (FIT) program. Japanese manufacturers began enjoying full access to the lucrative domestic market and started to see the improvements in their bottom lines.

Taking advantage of the uptick in business, Japanese manufacturers have put all of their resources into the domestic market. They have increased shipment and production, improved cost structure, and moved beyond the “module only provider” phase through horizontal and vertical expansion into the downstream solar value chain.

Domestic Market Focus

Japanese manufacturers were export-oriented due to the better profit margin they could earn in German and other European markets. However, that trend is now over. At 1Q’13, Japanese PV makers kept 90 percent of what they produced in the domestic market, compared to just about 30 percent at 1Q’09 (Figure 1).

Figure 1: Japan PV Domestic Production: Exports vs. Domestic Shipment

Japanese solar manufacturers have taken a “Japan shift,” said Nobuyuki Nakajima, Solar Frontier’s manager of communications. A few years back, Solar Frontier was export-focused, but since 2012 its domestic shipments have exceeded exports — about 80 percent of its modules will serve the growing domestic market in 2013, explained Nakajima.

Solar Frontier, a CIS (copper, indium, selenium) thin-film PV manufacturer, made its first-ever operating profit in the first quarter of 2013, two quarters ahead of plan. The company successfully reduced its material costs by 25 percent through the first half of 2012, bumped up its production capacity utilization to 100 percent at its 900-megawatt (MW) Kunitomi plant in January, and will resume production at its previously suspended 60-MW Miyazaki No. 2 PV plant in July to keep up with demand.

Kyocera, a vertically integrated poly-crystalline silicon PV manufacturer, has also been improving sales and profits by shifting its focus largely to Japan. According to Ichiro Ikeda, Kyocera’s general manager of solar energy marketing division, its domestic shipment accounted for about 80 percent of the company’s global shipment in FY2013 (April 2012 – March 2013), compared to about 50 percent in FY2010. It has been meeting the growing domestic demand by re-importing modules from its overseas production facilities in Czech Republic, China and Mexico. Ikeda said that Kyocera is planning to boost its shipment to over 1 gigawatt (GW) for this fiscal year (April 2013 – March 2014), up from 800 MW in FY2013.

PV Module Technology

The PV technology mix in Japan has also been changing. Domestic manufacturers largely produced poly-crystalline silicon (poly-si) technology, so it dominated the market. However, the Net FIT for the residential market revitalized the domestic market. Since then, the demand for high-efficiency or mono-crystalline silicon (mono-si) modules has gained popularity among homeowners who want to maximize energy production on their space-limited roofs.

SunPower (SPWR) and Panasonic, providers of world-leading, high-efficiency modules, are currently neck and neck, chasing the largest market share in the residential segment in Japan. Sharp and Mitsubishi Electric, previously poly-si module focused producers, started offering mono-si modules specifically for residential customers. Last year, Mitsubishi Electric announced the termination of poly-si modules production to focus on mono-si sales. Sharp, Japan’s largest PV producer, but deeply financially troubled, announced its very first outsourcing contract deal with SunPower to sell SunPower’s high efficiency modules under Sharp’s brand (“Black Solar”) for the domestic residential segment.

Although demand for mono-si modules is expected to grow, the launch of the full FIT program has ignited the large-scale, non-residential system market. Since its launch, the demand on more price-competitive poly-si modules has started to pick up again.

Sharp’s sales manager stated that Sharp’s current tactic is to ship mono-si modules to the efficiency-focused residential segment, and ship poly-si to the cost-conscious, non-residential segment.

The residential segment has been bread-and-butter for the Japanese module makers, providing a steady market with good profit margins; however, the module makers cannot ignore the potential growth of the non-residential segment, which is expected to grow much larger by volume than the residential segment in the next few years.

According to the Japan Photovoltaic Energy Association (JPEA), the non-residential segment grew by close to 900 percent in FY2012 (April 2012 – March 2013) from FY2011 (April 2011 – March 2012) while the residential segment grew by 55 percent. For the first-time ever, the non-residential segment exceeded the size of the residential segment.

Panasonic, a long-time producer of HIT (premium, high-efficiency modules) has even started offering OEM poly-si modules to capture the piece of the growing non-residential segment. In April, the company shipped 8,784 240-W poly-si modules, 2 MW in capacity, to a FIT non-residential project in Tokushima Prefecture – its biggest poly-si project in Japan.

The thin-film market is also making headway in Japan against silicon counterparts. A recent report states that thin-film PV lost more ground globally to silicon PV in 2012; however, the thin-film share in Japan is, in fact, increasing (Figure 2). Data released by JPEA shows that thin-film took 21 percent of Japanese PV technology market share in Q4’12, up from a 4 percent share in Q1’10. Solar Frontier is the biggest contributor to the growth of this segment.

Figure 2: Japan Domestic PV Market by Module Technology

Vertical and Horizontal Expansion

To protect its turf and profitability, Japan PV manufacturers are expanding their product and service offerings and strengthening their domestic networks against foreign PV markets, which now accounts for more than 30 percent of the domestic market.

Kyocera, Sharp and Solar Frontier have moved beyond “module only provider,” by vertically expanding into the downstream solar value chain, as an EPC contractor, project developer and independent power producer.

Solar Frontier has created an investment company, SF Solar Power, with the Development Bank of Japan (DBJ) to fund around 100 MW worth of medium-scale PV in Japan. These projects serve as a “sweet spot” since they are easier to acquire and interconnect than projects over 2 MW.

Last year, Kyocera joined forces with IHI Corp. and Mizuho Corporate Bank to construct one of a 70-MW PV project, the nation’s largest, in Kagoshima Prefecture. Kyocera will not only supply its modules but also undertake part of its construction, operation, and maintenance. The project is expected to be completed by this fall.

In terms of the horizontal integration, Kyocera, Sharp and Panasonic all have starting selling lithium-ion storage batteries with PV systems for the residential segment in order to offer the complete packaged solution to “create, store and control energy.” Kyocera will also add Home Energy Management System (HEMS) to its PV and lithium-ion battery system offerings.

To the World

The Fukushima Disasters in March 2011 certainly created a keen interest and demand for safe and clean renewable energy sources, including solar, but a solar revitalization plan had already been in the works.

In 2010, JPEA released “JPEA PV Outlook 2030,” which spells out JPEA’s vision to create ¥10-trillion (about $100 billion) Japanese PV industry and increase the share of Japanese PV makers or “Japan Brand” to 33 percent of the world PV supply by 2030, up from 8.5 percent in 2011. “Japan Brand” means modules marketed and produced by Japanese companies not only in Japan but also in other parts of world.

According to the Outlook, the domestic market will be saturated by 2020.

After that period, the survival of Japanese PV manufacturers will depend on how much they can expand outside the domestic market. The current revitalization of the domestic market is providing them with a chance to regain the strength required — technology, innovation, and production capacity — to last in this turbulent PV industry.

Junko Movellan is a Solar Industry journalist who writes and analyzes the US and Japan PV downstream markets. She has more than 10 years of experience in the PV industry, analyzing and developing business strategies for global companies. She previously worked as a Senior Analyst at Solarbuzz and as a Market Development Analyst at Kyocera. She is based in California, USA.

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

Income From Hydroelectric Power

Mon, 17 Jun 2013 15:46:21 -0500

by Debra Fiakas CFA

Are you an investor hungry for current income? Is there a green line of global warming fear running through your investment selections? I have stock that fulfills both requirements. Brookfield Renewable Energy Partners (BEP: NYSE) is a renewable power producer with assets in Canada, the U.S. and Brazil. Brookfield generates over 5,900 megawatts of power each year from plants running on river water, wind or natural gas. Another 2,000 megawatts is apparently under development in Canada and Brazil.

What Brookfield does best is hydroelectric production. The company claims over 170 hydropower stations across the U.S., Canada and Brazil, diverting river water through turbines to generate very clean energy. Hydroelectric power generates less than 5% of the greenhouse gas emissions from coal-fired power plants, which can spew out as many as 900 tons to 1,000 tons of carbon dioxide per gigawatt hours of electricity produced. More details can be found from the Global Reporting Initiative provides information on the greenhouse gas emissions from various power sources.

If Brookfield’s hydroelectric power is green enough for you, then let’s move on the company’s generation of income for its shareholders. Since Brookfield shares began trading in October 2001, the stock price has climbed steadily to a level 230% higher than its debut price.

Brookfield started paying a quarterly dividend in December 2011. Management has pledged to distribute between 60% and 70% of funds from operations as well as to grow distributions by 3% to 5% each year. The current quarter dividend is $0.3625 per share. At the current price that represents a very attractive forward dividend yield of 5.1%. Does Brookfield have the cash to fulfill its dividend pledge?

Brookfield has reported net losses in two of the last three years. Yet, investors looking only at net income will not get the full answer to the dividend policy question. Indeed, the company consistently generates significant positive cash flows. In the last twelve months Brookfield converted $1.33 billion in revenue to $395.0 million in cash from operations. Brookfield’s sales-to-cash conversion ratio of 29.7% stands out among power producers. What is more Brookfield has $227 million in cash on its balance sheet. That is a good nest egg, but we do note the company has $7.2 billion in debt on the balance sheet as well.

Despite the debt, Brookfield is an attractive holding for income-seeking investors. The icing on the cake is a beta measure of risk at a tepid 0.40. If the stock as it trades on the Toronto (BEP.UN: TSX) or New York exchanges (BEP: NYSE) appears a overpriced, there is several series of preferred stock that also trade on the Toronto exchange.

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.

LEDs: A better light bulb. Again.

Sun, 16 Jun 2013 09:16:11 -0500

by Marc Gunther.

So you remember CFLs, right? The curlicue bulbs? The time they took to go on? The harsh light?

Despite their drawbacks, compact fluorescents have sold fairly well in the US. They save customers money. Utilities promoted and subsidized CFLs, particularly in California. Walmart (NYSE:WMT) pledged to sell 100 million of them. Time magazine put one on the cover. By 2012, CFLs represented 27 percent of the bulbs installed in the over 3 billion medium screw-based sockets in the United States, according to a Navigant study quoted by NRDC. Other researchers put the number lower, about 20 percent, says IMS Research.

The trouble is, no one likes CFLs very much. Some CFLs took three minutes to turn on, for goodness sake! Consumers were dissatisfied with the quality of the light, and rightfully so, as even advocates of CFLs acknowledged.

Which is why Cree, Inc. (NASD:CREE), a leading manufacturer of LED bulbs, is taking direct aim at CFLs, as well as old-fashioned incandescents, as it tries to win mainstream America over to LEDs–which, by most accounts, are a superior alternative to CFLs and incandescents.

Can CREE and other leading manufacturers of LEDS—-they include Osram Sylvania, Phillips Lumileds (NYSE:PHG), and General Electric(NYSE:GE)–persuade Americans to change their lightbulbs, yet again? The stakes are high, for consumers and for the environment.

Recently, I asked Mike Watson, Cree’s vice president of marketing, about the company’s approach.

He told me that Cree will try to sell LEDS by telling people that they last longer and cost less than CFLs and incandescents, without requiring any sacrifice when it comes to performance.

“The whole point of the CREE LED bulb is to mimic incandescent light as much as we can,” Watson told me.

“CFL presented consumers with a lot of frustrations and tradeoffs,” he said. “As energy efficient as they may be, you paid for it by not having the light you want.”

As for incandescents, he said, they are like throwing money out the window. It’s time to bury that technology, as this Cree TV commercial suggests.

One thing that Cree will not do is focus on the environmental benefits of its bulbs.

“We don’t market ourselves as a green company, even though we really are,” he said. “The term ‘green’ to a consumer is as much political as anything else.”

“The economics come first,” he said.

He’s probably smart to shy away from green labels. As National Geographic reported recently, when academics at the Wharton School and Duke surveyed consumers about energy efficiency, they found that conservatives turned away from the bulbs when they were labeled with a “protect the environment” sticker. Crazy.

The fact is, LEDs are the environmentally-preferable choice. The U.S. Department of Energy’s Pacific Northwest National Laboratory (PNNL) studied LEDs, CFLs and incandescents, looking at their ”total environmental impact, including the energy and natural resources needed to manufacture, transport, operate and dispose of light bulbs.” Its report concluded:

Today’s light-emitting diode light bulbs have a slight environmental edge over compact fluorescent lamps. And that gap is expected to grow significantly as technology and manufacturing methods improve in the next five years.

But while LEDS make economic and environmental sense, persuading consumers to try something new and different–again–won’t be easy. Sticker shock remains an issue. But a Cree 9.5-Watt dimmable LED bulb, which is the equivalent of a 60-watt incandescent, retails for $12.97 at Home Depot. A 6-pack of GE 60-watt incandescent bulbs sells for $3.97.

Of course, they are simply not equivalent products. LED bulbs use 80% or more less energy and last 25 times longer than incandescents, as CREE’s marketing message says:

Most experts believe that CREE and the other leading LED makers will eventually be able to overcome those obstacles and drive sales. Prices of the bulbs are falling–some sell for less than $10–and the light quality is fine. CREE sent me a few sample bulbs a few weeks ago and I’m satisfied, so far. They turn on instantly, and they are dimmable. Consumer Reports said recently that its initial tests of Cree and Phillips bulbs priced between $13 and $15 showed promising results.

Earlier this year, Gerard Wynn, a market analyst for Reuters, wrote:

The LED lighting industry is set to dominate the global market more than a century after its discovery, benefitting from a widespread ban of conventional incandescent bulbs and as the market share of competing green replacements fade.

Let’s hope he’s right.

DISCLOSURE: None.

ABOUT THE AUTHOR: Marc Gunther is editor at large of Guardian Sustainable Business US and a contributor at FORTUNE magazine and a blogger at marcgunther.com. Marc is the author or co-author of four books, including Faith and Fortune: How Compassionate Capitalism is Transforming American Business (Crown 2004). His newest book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

California's Other Ethanol Producers

Sat, 15 Jun 2013 08:53:59 -0500

by Debra Fiakas CFA

In the last two posts Pacific Ethanol (PEIX: Nasdaq) and Aemetis, Inc. (AMTX: OTC/BB) got all the attention. Both companies have crafted their facilities to accept lower-cost sorghum as an alternative feedstock, opening up the door to lower carbon intensity measures for their ethanol output. There are other ethanol producers in the state, which we believe are still relying on corn as feedstock. Which companies will remain in operation in California is not yet clear. Standards sets by California Air Resources Board (CARB) for the carbon intensity of alternative fuels favors local producers and renewable diesel or biofuel over corn-based ethanol.

Calgren Renewable Fuels has operated a 55 million gallon ethanol plant in Pixley, California. For feedstock Calgren is bringing in corn from the Midwest by train. If you have read by two previous posts, the words Midwest and corn should cause some concern for how the company’s product will fair under CARB’s carbon intensity standard. However, Calgren claims its carbon footprint is small than most and its production of ethanol per bushel of corn is higher than average. Calgren has been fiddling around with cow manure to make ethanol, receiving a $4.5 million grant from the California Energy Commission to construct a digester to make biomethane.

Coshochten, Californai is home to the ethanol plant of AltraBiofuels. It has a capacity of 60 million gallons and has been in production since 2008. Like Calgren, AltraBiofuels is sourcing its corn feedstock principally from the Midwest.

California Ethanol Power stands apart from the rest of the pack. CE&P plans to source its feed stock from sugar cane produced in the Imperial Valley. Once its facility is operation in late 2015, CE&P plans send its ethanol by truck to customers in southern California and Arizona.

Parallel Products offers yet another twist on ethanol production. Parallel is using waste consumer products to produce ethanol. Fermentation of sugar laden liquids and the distillation of alcohol-based wastes yield 5 million gallons of ethanol per year. Headquartered in Kentucky, the company operates five facilities around the country, including one in Ontario, California. Parallel says this facility receives over 3.5 million cases of dated or damaged beverage products annually. The carbon intensity of Parallel’s products is not clear. Its business model is highly unique.

There is no immediate investment opportunity in any of these companies. AltraBiofuels showcases its venture capital and private equity investors, but the rest are a bit circumspect on where the got start-up capital. What might be more important for investors to watch in this group is potential merger and acquisition activity. With the exception of Calgren, which seems to be using conventional fermentation and distillation processes, each appears to have developed unique technologies and processes. What is more these processes seem to have been proven economically viable as well as scientifically sound. In my view, that makes each of these Golden State operators a plum target for others who need to improve competitive position with lower-carbon content alternative fuel production.

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.

The Battle for California’s Ethanol Market

Fri, 14 Jun 2013 09:48:19 -0500

by Debra Fiakas CFA

For all the fuss, investors might think California’s ethanol market is another Gold Rush. The Midwest-based ethanol producers are up in arms over California’s attempt to set standards for renewable fuels sold in the state. My recent post, describes legal maneuverings by South Dakota-based ethanol producer Poet, LLC and others to block a ‘carbon intensity’ standard imposed by the California Air Resources Board (CARB).

Under the CARB standard the carbon intensity of alternative fuels includes elements for power and other inputs as well as transportation and distribution. The formula CARB is using give Midwest suppliers of ethanol a significantly higher carbon content rating than just about every other alternative fuel category.

In 2012, the U.S. produced approximately 13.8 billion gallons of ethanol. About 85% of that production originated in the Midwestern States. California’ ethanol market is the largest in the U.S. and represents the majority of sales by Midwest-based ethanol producers. Poet and its peers in corn country cannot afford to let its market share in the Golden State.

If Midwest ethanol producers believe they are disadvantaged by the California low carbon standard, it stands to reason there must be others that will benefit. The renewable diesel and biofuel producers are noticeably absent from the legal fray. Nor have any of the California-based ethanol producers had anything to say.

Winners and Losers...

We identified algal-based renewable diesel developer Sapphire Energy and Neste Oil (NEF: MU) as two parties which have already made some moves toward the California market. Neste Oil claims it is the largest producer of renewable diesel in the world, with operations in the U.S. and Europe. Neste just signed an off-take agreement with Cellana, Inc., a cultivator of algal oils with operations in Hawaii and California. In March 2013 Sapphire landed an off-take agreement with oil refiner Tesoro Corp. (TSO: NYSE). Tesoro is buying an undisclosed amount of algal-based oil produced at Sapphire’s New Mexico plant. Tesoro has two refineries in California at Martinez and Los Angeles and just recently bought another refinery from BP (BP: NYSE) located in Carson. Do not expect Tesoro or Neste to begin blending algal-based renewable diesel until 2014 at the earliest.

Even if these algae cultivator partners were already producing at scale, the situation does not present an accessible investment opportunity for minority investors like you and me. Sapphire Energy is a private company that appears to have all the financial support it needs from venture and other institutional investors.

Cellana, which used to be known as HR BioPetroleum, is currently working on a Series A financing that could be open to qualified investors. Royal Dutch Shell had been a joint venture partner until HR BioPetroleum bought out its stake in 2011. Cellana has made disclosures of government funding sources, but has kept mum on investors. The company was founded by two University of Hawaii scientists, Dr. Mark Huntley and Dr. Barry Raleigh who are also members of the board of directors. An offering circular will no doubt provide details on financing requirements and the magnitude of any revenue sources, if there are any at this point in Cellana’s development.

More Winners...

Algae is not the only potential beneficiary of California’s attempt to strain out the carbon content of transportation fuels used in the state. The post “Sorghum Power Ball” on December 4, 2012 followed sorghum’s designation by the U.S. Environmental Protection Agency as an advanced fuel. Pacific Ethanol (PEIX: OTC/BB) had recently announced that California-grown sorghum provided 30% of the feedstock used in its ethanol production in third quarter 2012.

At the end of 2012 California-based Aemetis, Inc. (AMTX: OTC/BB) announced its intentions to transition from corn feedstock to sorghum at its Keyes, California ethanol plant. Integrating a combined heat and power system into its process creates enough efficiency to qualify Aemetis’ sorghum-based ethanol as a renewable fuel with a lower carbon rating. The plant has a 60 million gallon production capacity.

Both companies could benefit if CARB prevails in legal battle over its low carbon fuel standard. What is more both are accessible to investors in the public secondary market. Now that we have established there is wind at the backs of these companies that could drive revenue and profits, let see how much it will cost.

Pacific Ethanol shares have a beta measure near 3.90, indicated a long position in PEIX would be a cheap, but exciting roller coaster ride. This puts a bit of pressure on an investor to pinpoint enterprise value. In 2012, the company lost $20.8 million on $848.8 million in total sales. Indeed, Pacific Ethanol only produced an operating profit in the year 2011 when sales topped $900 million. Sales in the first quarter 2013 recovered and if that pace is maintained the company could deliver another $900 million in total sales for the year 2013. Unfortunately, it looks like management has become a big spender as operating expenses were significantly higher in the quarter, putting into doubt a profit even on $900 million in sales. PEIX shares are trading at 0.20 times assets, most of which are tied up in the ethanol-making plant and equipment. These plants have been proven to have value even in bankruptcy and we think this stock might be undervalued in terms of asset value.

With such a short history, valuing Aemetis is even more challenging. However, AMTS is priced more like an option on the company’s business strategy and management’s ability to execute on the growth plan. Thus a long position in Aemetis is contingent on an investor’s confidence that competitive conditions in California will continue to favor local producers - at least in part. The other part of the bull-case is the qualification of management. Aemetis is still run by its founder Eric McAfee, a farmer-venture capitalist. He is also co-founder of Pacific Ethanol and left when the company went public in 2005. McAfee has a string of solar power and alternative fuel investments.

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.

Another Chance To Buy Power REIT On The Cheap

Thu, 13 Jun 2013 08:40:59 -0500

Tom Konrad CFA

An earlier version of this article appeared on the author's Forbes blog on June 3rd.

An article about Power REIT (NYSE:PW) that came out on Seeking Alpha on May 30th has sent some investors running for the hills.

The article has since been removed from Seeking Alpha. According to PW's CEO, David Lesser, Seeking Alpha’s editorial staff concluded that it had reached unsupported and erroneous conclusions after discussions with him and Ryan Griffin, the article’s author. Ryan Griffin told me that he did not have time to respond to the information Lesser sent Seeking Alpha challenging his conclusions. He was confident that, when he has time to respond, the article will be reinstated. However, he also told me that his goal was to get the article to be reinstated by "Monday or Tuesday" (6/10 or 6/11) and that had not happened.

Even if the article is reinstated, I disagree with its conclusions, and I doubt the opportunity to buy this speculative Rail/Renewable Energy REIT in the $9 range will last long. The stock is very illiquid, so even a few investors bailing or buying can send the stock for great swings.

Here, I’m going to try to address the main points of the article, without going into details.

The core of Griffin’s argument was that investors are not considering the risks inherent in the civil action brought by Norfolk Southern Corp (NYSE:NSC) and Wheeling and Lake Erie Railroad (WLE) against Power REIT to prevent the latter from foreclosing on the lease of 112 miles of track it owns, and which are leased to NSC and subleased to WLE.

I am probably the main person Griffin is referring to here, since I wrote in December how the lawsuit would be good for Power REIT even if they lose the case. The reason for a “lose” being good is that, even in a loss, Power REIT will be able to write off $16 million or more in the form of debt from NSC and WLE that they are trying to collect, and this will allow them to distribute future dividends to shareholders in the form of tax-free return of capital for decades to come.

I also believe that in a “loss” WLE and PW will be liable for Power REIT’s legal expenses, because of a clause in the lease saying that the lessee is responsible of any legal expenses incurred to protect its interests in the the leased property. Griffin thinks this is not so clear.

I think that, at the $10-$11 range PW was trading at, the benefits of a “loss” were fully priced in to a stock. Those of us who still think PW is worth holding at those prices are indeed valuing the hope that PW will win on at least some of the points they have made against the lessees. Before Griffin’s article, PW was actually gaining ground because some recent revelations about WLE selling oil and gas leases on PW’s land and not providing records to PW as required by the lease which seem to strengthen PW’s case.

Griffin also felt that the first solar deal was "uneconomic," citing a "70x multiple" and claimed that this deal could drive PW into bankruptcy. His numbers don't seem to add up.

By my calculations, the deal would only be uneconomic under the bridge loan currently used to finance it if significant SG&A expenses are charged against it. When the bridge loan is refinanced, I expect it to be modestly accretive to earnings. Griffin's statement that the project had a "70x multiple" does not agree with my calculations at all: The $1.04 million purchase came with a $80,800 annual rent (with a 1% annual escalation.) After accounting for the assumption of a 5%, $122,000 sewer financing which was taken on as part of the purchase price, I get a price to net revenue multiple of 12.25x.

I, like Griffin, don’t like PW’s CEO David Lesser loaning money to the company at 8.5% interest, which was the step-up rate on the bridge loan he used to finance the deal. However, according to Lesser, the bridge loan has been revised to remove the step-up in interest rate (leaving the initial 5% interest rate), and PW has recently signed a term sheet to replace the loan with bank financing. I expect more details on this financing soon. Future solar deals should be larger, and bank financing easier to obtain when the legal mess is wound up. Even if PW were paying 8.5% on the bridge loan after the first six months, there would still be a net profit (before SG&A expenses) of $26,794 in the first year on the $115,000 cash PW put into the deal. In the second year, profit would fall to $6,700 because of the step up in interest in the bridge loan, slightly offset by the 1% annual rent increase, but future profit would trend upward even in the event PW is not able to obtain more attractive financing. To me, it seems unlikely that PW will have to pay 8.5% to refinance the deal, and the difference from a lower interest rate would go directly to profit.

If the whole deal were to be financed at a 5% interest rate, PW's annual net profit would be $29,100, and this would increase in subsequent years.

I don't see how this deal, which looks marginally profitable even under an 8.5% bridge loan, could drive PW into bankruptcy, as Griffin claims.

Griffin made a number of other points which I consider less core to the argument, but I will attempt to respond to them briefly:

PW cut its dividend to $0. Griffin thinks this is a bad thing, but I think it is a good thing. I, and at least one other professional investor I have been in contact with, suggested the cut to Lesser. We felt that as long as the lawsuit was using most of PW’s cash flow, PW should not be issuing stock and diluting current shareholders just to pay a dividend.
The civil case could last for years of appeals during which time PW will have to issue stock to pay legal bills. While this is possible, and NSC can fund the lawsuit forever without even really noticing the cash flow drain, WLE does not have NSC’s financial strength. The fear of having to pay PW’s legal bills as well as its own will be a strong incentive on WLE to settle, especially if the initial rulings are not in its favor. If the initial ruling is in WLE and NSC’s favor (and a Summary Judgement could be handed down as soon as August or September,) PW will not drag things out. The costs of the case are also likely to fall after the end of the discovery and expert witness phases, currently scheduled for the start of July. See PW’s recent litigation update [PDF].
WLE can pay for the lawsuit longer than PW can, but can’t afford to pay if PW wins. These two statements seem to contradict each other, and NSC is on the hook for at least $7M of the settlement account, and possibly for the entire sum of any award, since NSC is the lessee, and WLE is only a sub-lessee.
Shareholder trying to remove Lesser in previous years. Griffin seems unaware that while a shareholder group unsuccessfully challenged Lesser for control of the company in 2011 and 2012, there was no such attempt this year. He did not mention that the lead shareholder of this group had a tiny holding of stock, and was trying to get WLE’s President on PW’s board – a clear and undisclosed conflict of interest.
Griffin says PW is suing WLE and NSC. This is false: WLE and NSC brought the civil action against PW to prevent PW from foclosing on the lease. This makes a difference since Griffin’s worst-case scenario revolves around PW having to pay their legal bill because it brought a lawsuit that might be found spurious. But PW did not bring the lawsuit, and given WLE’s apparent multiple violations of the lease, PW’s claims and grounds for foreclosure seem far from spurious to me.

Conclusion

PW is a very illiquid stock that was driven down 25% by panic selling. Although Griffin points to very real risks, his price target is laughable. Lesser seems to agree with me, and he is putting his money where his mouth is. He has been adding to his position all along, but has made much larger purchases since the Griffin article came out.

By the way, Lesser is very accessible to investors. As I said, I have very little time this week, but if you want more details, I suggest you contact him directly. I’ve been trying to persuade him to make all the public filings in the civil case available on PW’s website. He’s been helpful at emailing it to investors who do not have a PACER account (or don’t want to pay $1 a page.) If readers inundate him with requests for documents, I bet he will get on this sooner rather than later.

Disclosure: Long PW. I have added a little to my position recently in the around $8.42 for short term trading purposes, and may sell these shares at any time; I have GTC limit orders in place to do so. My much larger long term stake remains intact.

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.

These Solar Panels Do NOT Work!

Wed, 12 Jun 2013 09:25:02 -0500

By Jeff Siegel

Solar Failures Rising

Those who wish death upon the solar industry are about to be given a gift.

According to a New York Times investigation, reports of defective solar panels are starting to rise — just as the industry is on the cusp of significant adoption and expansion.

Energy analyst Todd Woody points out that no one is exactly certain how pervasive the problem is, writing:

There are no industry-wide figures about defective solar panels. And when defects are discovered, confidentiality agreements often keep the manufacturer's identity secret, making accountability in the industry all the more difficult.

Here's the problem...

In an effort to cut costs, solar cell and panel manufacturers — as well as chemical companies that provide specialized materials for the industry — have been cutting corners. As a result, quality control may have been suffering.

And unfortunately, the extent of these cost-cutting measures may not be fully realized for another year or two, as the lion's share of new solar installations were rolled out in 2012.

In other words, any potential defects tend to take a few years to be noticed.

For instance, a solar power system on a warehouse in California has recently been discovered to have faulty coatings on its panels. This has resulted in hundreds of thousands of dollars in lost revenues. Certainly not the kind of PR the solar industry is looking for...

But because of confidentiality agreements, the public has no idea as to who provided these coatings.

Of course, I would actually argue that the coatings found on solar panels today will be as relevant as the typewriter in another year or two...

The truth is while conventional coatings have been used primarily as a protective measure, new coatings coming out of U.S. labs are now also providing increases in efficiency.

Certainly you've read about those new “black solar” coatings that actually boost the amount of power generated by solar power systems. Black solar is actually the next generation in coating technology.

Quality Control

While faulty coatings have been to blame on some projects, overall, it looks like cell and panel manufacturers have been skimping on quality control, too.

But due to confidentiality agreements and the dozens of panel and cell manufacturers that supply the industry, it's hard to pin down the responsible parties.

Most analysts with whom I have spoken believe the lion's share of defective cells and panels are coming from China, as China isn't particularly known for quality or transparency. But I'm not so certain you can cast that wide of a net.

I'm not saying that most of these defective materials aren't coming from China. After all, the odds alone favor such an argument. The majority of the world's cell and panel suppliers are based in China.

But I wouldn't be so quick to assume guilt by Chinese association on this one...

The Race to Grid Parity

SolarCity (NASDAQ: SCTY), a quality solar installer and leasing company, is not an organization that is likely to gloss over quality concerns. Run by the same guy who runs Tesla (NASDAQ: TSLA), Elon Musk, the company has proven to be a major force in the solar sector.

SolarCity actually uses a couple of Chinese manufacturers, including Yingli (NYSE: YGE), which has actually had a small number of defective modules returned. We're talking 15 of the nearly 3 million that now call the United States home. As well, YGE offers insurance policies to its customers and runs a separate testing facility in the United States, where quality control tends to be a bit more stringent than in China.

Of course, it should be noted that U.S. manufacturers have also had their fair share of defective modules. But for the sake of clarification, the major U.S. manufacturers don't actually manufacture everything domestically. For instance, SunPower (NASDAQ: SPWR) runs a manufacturing facility in the Philippines.

In any event, it'll be interesting to see how this plays out over the next year or two. I do believe we will see more defective systems, and this will likely be the final nail in the coffin for those manufacturers that are already teetering on the edge of the abyss.

You can cut costs all you want. But at the end of the day, you get what you pay for.

I believe it was Benjamin Franklin who once said, “The bitterness of poor quality remains long after the sweetness of low price is forgotten.”

So, will defective solar panels hurt the industry? Absolutely. But it won't be enough to stop its amazing ride to grid parity.

As long as the problem doesn't persist, this bump in the road will be miles behind us in no time at all.

That being said, I wouldn't be too quick to jump on any solar manufacturers any time soon. If you want to play the solar sector, stick with SolarCity.

To a new way of life and a new generation of wealth...

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

What Makes Solar Energy a Good Investment?

Tue, 11 Jun 2013 09:18:59 -0500

by Billy Parish

Five years after the Great Recession, most Americans have yet to regain their faith in our country’s largest financial institutions. The Dow is up, but the latest Financial Trust Index shows that 58% of Americans expect the stock market to drop 30% or more this year. Meanwhile, a recent Harris Poll noted that only seven percent of the public trusts the leaders of Wall Street.

Strangely, the same poll which found that most Americans think stock prices will decline also found that 92% of Americans plan to hold or increase their investments in the stock market.

What’s going on here?

Why do we put our money in institutions that we don’t trust and investments that we think are going to decline in value?

The problem comes down to a lack of quality investment options. It’s hard to access a mix of investments that will provide reliable returns over the long run. Add in criteria about not investing in harmful or risky industries and the task of finding a good investment can start to look impossible.

Fortunately, solar energy is a good investment for Americans, particularly when paired with new kinds of investment marketplaces like Mosaic. Here is how we think about our investment product:

Financial Returns

Big banks are good at financing big projects. But for smaller projects, like commercial scale solar energy, big banks lend at exorbitant interest rates, if they lend at all. This fact makes it possible for Mosaic to make solar energy loans with interest rates that are lower than those charged by banks, but still high enough to provide competitive returns for investors.

To date, over 1,500 investors have used the Mosaic platform to provide more than $2.1 million in financing to projects in California, New Jersey, and Arizona. The expected annual returns on our most recent loans has been between 4.5% and 6.38%. With 10 year Treasuries at near historic lows (1.90%), CDs at 0.5% APY, bonds averaging 5.20% from 2003-2012 and stocks in the S&P 500 averaging 4.95% annualized returns from 2003-2012, Mosaic’s expected yields are competitive with the best investment products on the market.

Financial Risks

Like all investments, solar energy investments through Mosaic do not come without risks. Transparency is a core value, so we post the prospectus of each project on our website and encourage investors to read the prospectuses in order to understand the risks associated with our investments. Specifically, the broad categories of risk facing solar projects include credit risk (a borrower defaults), technology risk (solar panels fail), weather risk (a storm destroys solar panels), or operational risk (Mosaic goes out of business).

In the case of credit risk, Mosaic offers debt, rather than equity, financing for solar projects. if a project encounters a problem, our investors recoup their money first. We also employ rigorous underwriting procedures, which involve not only Mosaic’s project finance team, but also third party lawyers, engineers, and insurance experts to review every project. Finally, looking to the future, we recently helped found a solar industry consortium called truSolar, which aims to standardize the risk evaluation process for solar projects. Founding members of the group include 16 leading businesses and research groups, from DuPont and Standard and Poors to the Rocky Mountain Institute. By working with other thought leaders to establish best practices for risk evaluation, we aim to drive down financing costs across the solar industry.

In the case of technology risk, solar equipment is itself very reliable, to the point that manufacturers typically offer 25-year warranties for solar panels and solar inverters. Insurance for events like fires or hurricanes adds another layer of protection against weather risks.

Finally, in the event that Mosaic goes out business, we have entered into a backup servicing and successor agreement with Portfolio Financial Servicing Co. (www.pfsc.com) that would ensure the servicing of all issued loans. PFSC is one of the largest third party lease, loan and structured settlement servicers in the U.S., with $11 billion under management.

Where Does Distributed Solar Fit in a Balanced Portfolio?

For most investors, financial risk and return information doesn’t mean much outside the context of a broader portfolio. Most individuals and institutions invest in a portfolio of assets. We might invest in the stock market and in municipal bonds. Maybe we invest in ourselves, via payments for education, or in our homes, via expenditures on energy efficiency. So where do Mosaic’s investment products fit into this mix?

Our investment products function much like a bond. Debt generally lacks the significant upside potential of a stock (investors won’t earn more than the projected annual interest rate), but has less downside risk as well. Investors are repaid their loans, with interest, on a monthly basis. Investors could look at a Mosaic product to fulfill the same role in a portfolio as Treasuries or other kinds of fixed income investments.

More broadly, we see our products offering a hedge against two types of market risk.

First, because our investments are in tangible, localized assets, they are “uncorrelated” and offer a hedge against dramatic shifts in global markets. If you’re heavily invested in major corporations or commodities, investing in community-based assets could make good sense.

Second, our investments hedge against the increasingly systemic risks facing fossil fuels. Energy is the world’s largest industry, and so it should come as no surprise that energy investments make up a large chunk of the portfolios of institutional and individual investors alike. Global energy markets have experienced major swings for fossil fuel prices in recent years -- oil, for instance, running up two historic price peaks with a crash in between, or gas plummeting in cost, and now rapidly rising -- and it’s only going to get worse. In particular, we think it’s important for investors to understand that fossil fuel companies are betting against action on climate change. HSBC recently warned that the top 200 fossil fuel companies could see a 40-60% decline in their equity value if governments take action to curb climate change. Mosaic investments represent a way to start moving away from fossil fuels before the bubble bursts.

Compounded Good

If you invest in an index or mutual fund, or keep your savings in an account with a national bank, there’s a strong chance you are financing the operations of some of the world’s largest fossil fuel companies. As a father, I see this as illogical. What’s the point of making an investment that will pay for my childrens’ future if it also harms the world they inherit?

Mosaic investments run in the opposite direction. Our investors have so far financed enough solar energy to power 95 typical American homes every year. They’re creating societal gain, without compromising their personal gain.

But let’s break that down a bit further. The magic of investment is that it compounds. So what kind of compounded good could we create?

Well, our first fifteen hundred investors have put in $2.3 million. Assuming they all reinvested their money in new solar projects, and assuming they earn a rate of 4.5%, in ten years they would have a little over $3.6 million invested in solar energy. In twenty years, they’d be approaching $5.6 million invested, enough to power perhaps 600 American homes every year.

At Mosaic we believe the fastest way to create a 100% clean energy economy is to let everyone benefit from it. That’s why we work every day to create a rock solid, accessible clean energy investment.

Rent this EV Stock and Enjoy the Ride, But Don't Keep it Too Long

Mon, 10 Jun 2013 13:37:54 -0500

Tom Konrad CFA

This article was first published on the author's Forbes.com blog, Green Stocks on May 31st as "Kandi Technologies: Weighing The Evidence." I have since added a short update to the end of the article.

Last year, I brought Chinese off-road vehicle and electric vehicle (EV) manufacturer Kandi Technologies (NASD:KNDI) to readers’ attention. I like Kandi because the company was already profitable and trades for a tiny fraction of what a US-based EV maker would.

The Strategy

I also like Kandi’s electric vehicle strategy, which focuses on inexpensive commuter vehicles combined with battery-swapping. While this sounds a lot like the the strategy of recently bankrupt Better Place, Kandi’s strategy avoids one of the biggest problems with Better Place’s strategy: Kandi does not have to bear the expense of extra sets of batteries or swapping infrastructure. The batteries are owned by the local utility, which can use them when they are not in cars to provide stabilization and ancilliary services to the grid. Kandi just (profitably) manufactures the cars and licenses the battery swapping IP.

With the Chinese government in Beijing pushing hard for more “New Energy Vehicles” as the Chinese call EVs in order to cope with its horrific problem of urban pollution, even China’s largest privately owned automaker, Geely (HKEx: 175, OTC:GELYF) got religion, and has signed a 50-50 joint venture to produce EVs with Kandi.

The Valuation

With Kandi already profitable based on its legacy ATV business, I and other Kandi shareholders have long been frustrated that Kandi does not trade at a much higher multiple of earnings and revenue. Kandi has a trailing P/E ratio of 20, and trades at less than 2 time trailing revenue. Meanwhile EV high-flyer Tesla (NASD:TSLA) is trading at 13.5 time revenue, and 100 times next year’s expected earnings (Tesla lost money last year, and is expected to only break even in 2013.)

The China Price

There are several factors contributing to Kandi’s low valuation:

Kandi got its Nasdaq listing through a reverse merger, a strategy which was followed by a number of other Chinese companies, many of which were later found to have fiddled their books, absconded with shareholder funds, or otherwise been frauds.
As a result of its small market capitalization and the general wariness of Chinese stocks, no analysts follow Kandi.
A number of negative articles, many of which were written by investors who were short the stock, have highlighted irregularities in Kandi’s listing process and past reporting.

Although the negative articles about Kandi have been disturbing, none of them have turned up anything wrong with Kandi’s financial accounting. I’ve generally taken this as a good sign. When the same group of people who made good profits by shorting Chinese stocks and then exposing their accounting frauds have been unable to turn up anything so serious about Kandi, I have to wonder if there is anything to find.

With this in mind, I set out last month to parse through the novel-length and rather dense Kandi-bashing articles to demonstrate that there was nothing there for investors to worry about. I failed, and instead found myself doubting the judgement and/or honesty of Kandi’s management. I’d like to emphasize that there is no proof of wrongdoing, but investors who wish to hold on to their money don’t have the luxury of waiting until their suspicions are confirmed beyond a reasonable doubt.

Sharesleuth

The most in-depth articles looking into irregularities surrounding Kandi were written by Chris Cary of Sharesleuth. Carey is a former reporter for the St. Louis Post-Dispatch. Sharesleuth is funded by Mark Cuban, who often trades on the information Carey digs up before he publishes his articles. Some people find this business model distasteful but as Carey puts it, “If Sharesleuth.com exposes fraudulent companies and Mark Cuban uses profits from trades to finance more investigative reporting, then I’m OK with that.” I’m also OK with it. I don’t see the difference between Sharesleuth and any mutual fund manager who goes on CNN to talk about his portfolio. Or between Sharesleuth and a blogger writing about stocks he owns on Forbes or Seeking Alpha, for that matter.

The controversy about Sharesleuth’s business model mostly seems to arise because most of Cuban’s trades are on the short side. But in the case of Kandi, Cuban was never short. I asked Carey about this in an interview, and he responded that Kandi is a very difficult stock to short. For a billionaire like Cuban, the money he could make shorting a tiny stock like Kandi is hardly enough to move the needle. Carey uncovered the information in his articles in the course of investigations into the people who brought it public, along with ten other Chinese reverse merger companies, including New Oriental Energy (OTC:NOEC), Telestone Technologies Corp. (Nasdaq: TSTC); and Orsus Xelent Technologies Inc. (OTC: ORSX). Many of these have since been delisted, and Kandi is virtually alone among them for not trading well below its initial offering price.

Price chart of four Chinese Reverse Merger Companies. Source: Barchart.com

Clearly, Kandi should not be indited based on guilt by association, and the scrutiny the company has been under because of these associations should give us some confidence that any past misdeeds are either very well buried or have already been revealed. Nor do any of those misdeeds reach the level of the outright accounting fraud found in many of the Kandi’s reverse-merger brethren. Kandi has not been accused of anything illegal.

My distillation of the Sharesleuth revelations is:

A number of people made millions off Kandi’s reverse merger, and these people were never properly identified in the company’s SEC filings.
From 2009 to 2011, Kandi significantly overstated the number of EVs it sold. After Sharesleuth showed that Kandi’s claimed sales of EVs were not supported by the number imported or sold by Kandi’s dealers, the company quietly revised its financial statements, revealing that many of its claimed EV sales were actually sales of gas powered vehicles.

The Defense

Kandi’s defenders dismiss the first point as old news, saying that what should really matter to investors is Kandi’s current prospects. To the second point, they say that Kandi has admitted its mistake, and the miscategorization of sales of gas powered cars as EVs made no difference to Kandi’s revenue or earnings in any of the affected years.

They also emphasize that Kandi is not accused of any criminal act or fraud, and attempt to undermine the credibility of Kandi’s detractors by calling the negative articles paid hit pieces. Of course, Kandi’s defenders are long the stock (as am I), which is at least as much of a bias as being short.

My Take

I’m certainly happy that Kandi has not been accused of fraud, and I do prefer to focus on Kandi’s future than on events which occurred before I was ever a shareholder. On the other hand, when we’re trying to predict how management will behave in the future, our best evidence is how they have behaved in the past.

In the case of unknown individuals profiting from the reverse merger, this was at best bad judgment on the part of Mr. Hu, Kandi’s President, CEO, and largest shareholder. The reverse merger process seems to have needlessly diluted existing shareholders, and also shows Mr. Hu working with a number of unsavory characters, perhaps unwittingly. At worst, Mr. Hu and his associates may have directly benefited from the transactions in ways which were not disclosed.

Either way, the incident undermines my faith that Mr. Hu will do everything in his power to protect the equity of the company’s current small shareholders.

In terms of the misreported EV sales, the best case scenario is that it was simply a translation mistake. I find this scenario unlikely, because the exaggeration occurred repeatedly over a couple years. Nor does the fact that the mis-categorization of EV sales did not affect reported sales or revenues mean that the number of Kandi’s EV sales was not material to investors’ investment decisions. The Kandi “story” depended on the growth of its EV business even then: Here’s an article from 2010 making the link explicit: Kandi Tech Reports Strong Results, But Future Depends on Electric Car Growth.

Other Evidence

After couple of my picks recently revealed that they would have to restate their financial accounts because of misreported revenue, I began using the Beneish M-Score as an early warning system for earnings manipulation. I calculated Kandi’s M-Score based on annual accounts from 2010 to 2012, and on quarterly accounts for the last three quarters. The M-Score combines factors which might give a company an incentive to manipulate with factors which pick up the distortions caused by common forms of earnings manipulation. Details about how to calculate M-Score and a spreadsheet can be found here. For nearly all the periods I tested, M-Score indicates that Kandi has a moderate chance of having performed some earnings manipulation. Exactly what this probability is is hard to say, but the M-Scores are a long way from giving an “all clear.”. The 2010 annual report looks most likely to have been manipulated, mainly because of a high level of receivables growth relative to sales growth. Note that this period coincides with the inflated EV sales numbers.

Companies can have high M-Scores without having manipulated earnings, but a high M-Score says “proceed with caution.” Maxwell Technologies (NASD:MXWL) had an M-Score in the third quarter of 2012 that was similar to Kandi’s annual 2010 M-Score, and the next quarter they announced that they had been misreporting revenue since 2011. (I suspect Maxwell’s mis-reporting may be greater in extent than has yet been revealed.) M-Score will not flag all earnings manipulation, but it may flag some honest companies as well.

Reading through Kandi’s filings, I noticed that Kandi’s largest shareholder at the time of its listing was ExcelVantage Group, a fund controlled by a Chinese retiree Tim Ho Man. In 2010, Mr. Tim transferred control of ExcelVantage to Kandi’s CEO, Mr. Hu, “pursuant to a Transfer of Equity Agreement” between them. Kandi’s listing documents made no mention of any connection between Mr. Hu and Mr. Tim. While it is possible that Mr. Hu bought ExcelVantage from Mr. Tim in an arms-length transaction, it seems more likely to me that the two men had an undisclosed agreement between them which gave Mr. Hu effective control of ExcelVantage all along.

Once again, there is nothing illegal about this, but it had the effect of obscuring the fact that Mr. Hu retained a controlling stake of Kandi at the time it went public. That’s something I would have wanted to know had I been considering investing at the time.

Conclusion

There are a number of instances and red flags about Kandi’s management that lead me to want to proceed with caution. At the very least, the company has not been forthcoming with relevant information that investors would have been interested in. A company looking to build a reputation for good shareholder relations would have disclosed this information. At worst, the company may have intentionally misled investors regarding its EV sales at a time when its accounts also showed signs of possible distortion. If that’s the case, it would be reasonable to assume that they will do something similar in the future.

On the other hand, the evidence of Kandi’s current progress at building acceptance for its EVs is based not only on the company’s statements, but a large number of articles in the Chinese press, and agreements with Geely and a number of Chinese cities and provinces. My feeling from this is that Kandi will continue to rack up good press and increasing EV sales for the rest of the year. The fact that Kandi also recently filed an S-3 to allow it to sell additional securities also leads me to believe that, if the company is likely to exaggerate its results, it will do so in the coming months in order to boost the share price.

If you would like to read the full bull case for the stock, the best place to start is to read these three recent articles by Art Porcari.

After weighing the evidence, I no longer consider Kandi a long-term hold. That said, my concerns about management are long-term in nature, and I think Kandi’s short term trend will be up. This article itself may cause a downward blip, but Kandi’s shareholders are so used to negative articles about the stock that I doubt this one will have any long term effect, and I expect Kandi’s upward momentum will soon resume. I intend to maintain my reduced holding to take advantage of that trend.

Update 6/10/13: The upward climb I predicted above started much sooner than I thought, when a relatively minor news story about a car developed for the Kandi-Geely JV received approval from the Chinese government, and Kandi finally caught some of the Tesla (NASD:TSLA) fever. When I wrote this article 10 days ago, Kandi was trading around $3.80, today it's trading at $6.50. I'm now mostly out of the stock, having sold covered calls at $5, but I'm not ready to call a top. As Tesla showed, once an EV stock catches investors' imaginations, it can completely defy gravity and fundamentals. Bottom Line: If you still own Kandi, enjoy the ride, but this hot EV stock should be a rental, not a purchase or even a long term lease.

Disclosure: Long KNDI stock, short KNDI covered calls, MXWL.

Supersize My Whopper: Volt Gas Volt’s Fuzzy Math

Sun, 09 Jun 2013 11:33:01 -0500

Jim Lane

We were suitably intrigued by the headline, “Renewable Energy Program Could Make Fracking and Biofuels Obsolete.” And so the press release began:

“Project Volt Gas Volt, a new green program, shows the potential of storing renewable energy in surplus, which could make nuclear energy, natural gas, fracking, and biofuels seem like energy sources from the past.”

If that’s starting to sound like a pitch to fringe interests, read on.

“Surplus electricity that is generated by wind farms and solar parks and converted into methane can be stored for months in the existing natural gas grid. The surplus of energy makes it the battery for renewable energy while simultaneously making hydraulic fracturing (“fracking”) obsolete. The methane would be used to produce electricity, and district heating, or as a motor fuel. We will use the surplus energy from nuclear, now largely wasted at night, to help pay for the exit from nuclear. And we will use the CO2 generated from burning waste, biomass and from steel mills and cement plants to generate the methane.”

Later in the underlying documents, the process is outlined. Use electricity to split water into hydrogen and oxygen, blowing off the oxygen. “Mixing hydrogen with CO2″ to make methane (note: it’s not exactly explained how, technically, this is achieved, though there are paths to make this happen.). Storing methane and burning eventually to generate power.

Then this.

“The first small scale industrial installation (6.3 MW) for the conversion of electricity into gas is currently being built in northern Germany by Audi, in collaboration with SolarFuel and EWE (a biogas user). Current production costs are high – around 25 euro cents per kWh of gas produced. The aim is to reduce this to around 8 cents per kWh by 2018…compared with the price of imported Russian gas, including transport costs, which is around 4 to 5 cents per kWh (2 euro cents not counting transport).”

So, let’s see if we get this. It costs 5X of the incumbent now. 3X after unspecified improvement that is five years away.

So here are the whoppers.

1. Not a substitute in real-world terms. If biofuels and other technologies simply had to reach 5X of the fuel price today and 3X by 2018 – why, all of them would be competitive with $500 per barrel oil today and $300 per barrel oil by 2018.

2. Not really replacing, er, biofuels. Note that the process is dependent on waste CO2 from…oops, burning biomass. Also, elsewhere in the project outline, it mentions crude biogas as a source of waste CO2 as well.

3. Transporting gas or power. We also might point out the dependency on aggregated sources of CO2, which is going to require transporting large amounts of a) power or b) gas. Sources of the kind of pure CO2 that’s needed, and wind/solar generation projects are unlikely to be co-located. You might also note how the transport cost is not included here, but is included for the comparative (Russian gas). Stripping out all transport costs, the cost premium is 12.5X.

4. The water sourcing problem. Watch out for the water usage. And, if the reaction uses salt-water, better prepare to have a use for the residual chlorine that may be produced as a byproduct of the reaction.

5. The CO2 sourcing problem. Good luck getting the CO2, anyway. Ethanol plants, cement plants and steel mills are going the liquid route, in search of higher values – rather than selling CO2 as gas feedstock for the lower-value power market. Think Waste Management (invested in Fulcrum Bioenergy, Enerkem), BaoSteel (LanzaTech), St. Mary’s (Pond Biofuels).

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.

China Trys to Cork EU Solar Tariffs With Wine Probe

Sat, 08 Jun 2013 12:34:19 -0500

Doug Young

China is quickly learning how to play the game of tit-for-tat trade wars, with news that Beijing has launched a new anti-dumping probe against wines imported from the European Union. Anyone who has followed recent China-EU trade relations will know, of course, that announcement of this new probe by the Commerce Ministry comes the same day that the EU formally announced anti-dumping tariffs against imported Chinese solar panels.

While I certainly don’t condone this kind of trade war rhetoric, I have to say that China’s decision to target Europe’s wine industry looks like a very smart selection for this kind of probe. For starters, wine is one of Europe’s most famous products and is one of its biggest exports. At the same time, Chinese consumers are quickly discovering a fondness for imported wines, with European varieties fetching some of the highest prices.

All that said, let’s have a look at the actual news that saw the EU formally impose an 11.8 percent anti-dumping tariff on Chinese solar cells to take effect on Thursday. (English article) The tariffs were widely anticipated following a months-long investigation, and were actually quite a bit lower than most people had expected. But the rate could rise to 47.6 percent in August if China and the EU don’t reach a negotiated settlement in the matter before then.

Chinese solar panel makers were predictably dismayed, with Trina (NYSE: TSL) issuing a statement expressing its disappointment. (company statement) Yingli (NYSE: YGE) said it hopes the 2 sides will be able to negotiate a settlement, which is what some individual EU leaders have been pushing for to avoid a trade war. (company statement)

In addition to its usual angry statements of denial and condemnation, China this time has also responded by launching its own investigation into wines imported from the EU. (English article; Chinese article) This latest probe is similar to one that China previously launched against US makers of polysilicon, the main raw material used to make solar cells. China opened that investigation last year after the US imposed similar punitive tariffs on Chinese solar cells.

Media are pointing out that by targeting wine, China is looking to punish southern EU members like France and Italy that are big wine producers and were strong backers of the solar anti-dumping tariffs. At the same time, any Chinese anti-dumping tariffs on EU wines would have less impact on northern European nations, most notably Germany, which opposes the punitive tariffs on Chinese solar cells.

Personally speaking, I think this move targeting wine looks quite shrewd and is probably even justified. Europe is famous for providing extensive subsidies to its farmers, and the wine industry is one of the biggest recipients of the kind of state support that China gives to its solar panel makers. China’s growing thirst for wine means that anti-dumping tariffs against EU products could also have a major impact on some its major winemakers.

Of course the timing of China’s probe looks quite questionable, and anyone who doesn’t believe this particular investigation is linked to the solar trade war would be quite naive. The Chinese probe also looks dubious because most wines imported from Europe are already subject to relatively high taxes and are more expensive than domestic brands. That means any claims that EU subsidies are hurting the Chinese wine industry are most likely untrue.

I’m not a fan of trade wars, and I honestly don’t think this move by China will do much to help create a better atmosphere of trust if the 2 sides really want to mediate a solution. But at the same time, at least China’s wine probe may put some added pressure on the EU to try a bit harder to negotiate an acceptable solution to prevent the solar trade war from escalating.

Bottom line: China’s launch of an anti-dumping probe against EU wines will boost hostilities, but could also add pressure for the 2 sides to resolve their ongoing solar dispute.

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.

EU Moderates Tone in Solar Trade Clash with China

Sat, 08 Jun 2013 12:07:49 -0500

Doug Young

After more than a year of antagonism, I’m happy to see that the voice of reason finally seems to be coming to the ongoing clash between China and the west in their prolonged dispute over Beijing’s state support for solar panel sector. Germany seems to be the driving force behind this welcome change in tone, following German Chancellor Angela Merckel’s remarks last week that she opposed anti-dumping tariffs on Chinese solar cells being proposed by the EU’s trade office. Merkel correctly realized that a trade war over solar panels wouldn’t benefit anyone, and could potentially deal a crippling blow to a sector that will be critical to the world’s future energy security.

Following that behind-the-scenes pressure from Germany and perhaps 1 or 2 other European leaders, the EU’s trade commission has suddenly backed down in its previously aggressive stance towards China in the dispute. Media are reporting that the EU’s trade commissioner has decided to impose an 11.8 percent punitive tariff rate on imported Chinese solar cells from Thursday this week, far lower than the 47 percent rate that was initially planned. (English article) But the rate would rise to the original 47 percent in 2 months if China and the EU can’t reach a settlement before then to resolve the matter.

The dispute centers around western claims that China unfairly supports its solar panel makers by giving them numerous economic advantages, including cheap loans, low-cost land and tax incentives. Those incentives led to a huge build-up of China’s sector over the last decade, which resulted in a massive oversupply that has sent the global industry into a prolonged slump over the last 2 years. As a result, many of the western firms that pioneered the technology have gone out of business, and most of China’s big players are only continuing to operate with support from Beijing. (previous post)

Unhappiness about Beijing’s strong support for its solar sector led the US to impose anti-dumping tariffs on imported Chinese solar cells last year, and the EU is preparing to take similar steps following its own investigation. In both cases, Beijing did little or nothing to try and resolve the matter to avert a crisis, even though it had plenty of time to try to intervene while the months-long investigations were occurring.

Last week Beijing finally got a little more proactive by sending a delegation to Europe to try and negotiate a settlement. But those talks quickly broke down due to lack of experience by the Chinese negotiators. (previous post) Shortly after that happened, Merckel came out publicly and said Germany opposed the sanctions, which appears to be the main driver for this sudden softening of the EU’s stance in the matter.

So the big questions become: What will happen next, and will the 2 sides be able to reach a settlement before August? My guess is that we’ll see the Chinese side send a new delegation to Europe in the next week or two, and that this time we’ll finally see some serious negotiations take place. Since it’s unlikely that China can dismantle its extensive state support for the industry so quickly, we’re more likely to see the Chinese companies agree to simply raise their prices to a level that is comparable with products from their European and North American rivals.

I would give this latest round of negotiations a good chance of success, perhaps at around 70-80 percent, since I think that both sides truly want to settle this matter without a trade war. If they do reach an agreement, that could become a template for similar talks with Washington that could perhaps result in the rollback of US tariffs, providing another major boost for the embattled sector.

Bottom line: A softening of Europe’s stance in its solar panel dispute with China means the 2 sides now have a 70-80 percent chance of negotiating a settlement to the matter.

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.

Massachusetts: Green Bond Auction Hot, Other Bonds Tepid

Fri, 07 Jun 2013 10:28:51 -0500

by Sean Kidney

The Massachusetts AA+ green bond I mentioned last week got a lot of coverage on release this week – even the WSJ ran the story. But there was a twist: it seems the State had to scale back the total $1.1bn GO [general obligation] offering to $670m on tepid demand, but the green bond bit was 30% oversubscribed.

For all you prospective issuers out there: the green bonds also lured as many as 9 new institutional investors for Massachusetts bonds. One buyer went so far as to say “We think more municipalities should do the same." So perhaps this is Massachusetts starting a trend yet again?

Mind you, for those of us concerned about climate, Massachusetts is applying a broad interpretation of “green”, as Assistant Treasurer Steve Grossman said to BloombergTV. The bond has more of a Parks & Recreation focus than the IFC / World Bank flavors that inspired them, with only a subset of allocations looking like they would qualify under the Climate Bond Standard.

Cut to Climate Bond Standard board member, California State Treasurer Bill Lockyer:

“Climate Bond Standards offer a valuable tool to help investor to assess the integrity of environmental claims for green bonds.”

One important point: Massachusetts say they will be putting effort into transparency for investors via website reporting – good on them.

Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy.

Earnings Surprises Keep SunPower An Investor Favorite

Thu, 06 Jun 2013 13:27:08 -0500

By Harris Roen

The stock market has been paying attention to SunPower (SPWR) in a big way. At the end of May the stock hit an annual high of 23.76, a gain of 125% from where it was just a month earlier. That price is quadruple levels it was trading at in the beginning of the year.

Since May, the stock has seen about a 17% correction, and is trading sideways in the 18 to 20 price range. Volume at these high price levels have been impressive too—shares exchanging hands in the past 30 trading days exceeds that of the previous 64 trading days.

Investors have been impressed with the latest earnings report, and the company estimates that earnings per diluted share will turn positive next quarter, beating analyst estimates. Despite this recent jump in the stock price, is SPWR still a good investment?

SunPower is a small to medium sized California-based solar company with about 5,000 employees and $2.5 billion in annual sales. This vertically integrated solar company is involved in the manufacture, installation and service of photovoltaics. SunPower delivers solar to a huge array of customers around the globe, from rooftop residential systems to commercial, government and utility-scale power plant clients. SunPower claims to have the largest U.S. residential and commercial installed base, with over 100,000 residential systems installed.

A look at SunPower’s comparative financials paints a mixed picture of the company’s future prospects. The chart above measures SPWR against the average of 23 other solar companies in the same size range (those with annual sales between $1 billion and $10 billion).

When comparing debt and sales growth, SPWR beats out the competition. It posts numbers 50% above the other companies. It measures poorly, though, on earnings, profits and return on equity. Having said that, it should be noted that these three later measures are all negative on average for solar companies in the group, it’s just that SunPower’s numbers are more negative. So for example, the current EPS for SunPower is -2.8, compared to an average for the other solar companies of -1.3.

Solar installation as an investment theme is hot on analyst’s radar these days, and it is largely due to this part of SunPower’s business that the stock is getting so much attention. It is important, then, to compare SPWR against the other big players in solar installation.

The chart above shows SunPower compared to four other publically traded major players in solar installation: Real Goods Solar (RSOL), SolarCity (SCTY), Sunvalley Solar (SSOL) and Akeena Solar (WEST). This comparison, again, shows a mixed picture. SPWR compares well in market cap and price/book ratio, but measures up poorly on sales, net margin and return on equity.

I believe the main justification for investor interest in SunPower is its history of positive earnings surprises—this is a metric where SunPower shines. To illustrate, when earnings came in at $0.22/share for the first quarter of 2013, it handily beat consensus analyst estimates of $0.06/share. Similarly, earnings per share of $0.18/share for the fourth quarter of 2012 exceeded the average analyst estimate of $0.14/share. Once a trend like this is established, professional investors take notice.

So while SunPower may not rise to the top of comparable companies, it continues to be an investor favorite. As long as the company continues to perform well in the ultra-competitive solar sector, SunPower will remain one of the Roen Financial Report’s top picks.

Disclosure

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

About the author

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