BP Solar – Closing the “Grid Parity Gap”

Wednesday April 5, 2006

Last week I wrote a bit about BP Solar’s advertising and branding – it’s part of the marketing story, but definitely only part. Strategy is key.

BP Solar (North America) employs strategic marketing (though, how BP’s Alternative Energy marketing group which looks to be out of Houston, and BP Solar’s marketing in Frederick, as well as BP Solar’s overseas marketing groups work together is a curiosity). Vivienne Cox, BP’s Executive VP of Gas, Power & Renewables, said in November, and Karen Sterling of BP Solar’s North American marketing and communication’s group repeated to me, BP Solar’s goal is to drive solar to grid-parity – in other words, to make PV equal in cost to grid power for homeowners and businesses and to make it more widely available. That, says Sterling, is when solar will be attractive to more people.

BP Solar began collaborating with The Home Depot® in October 2004 to target the residential sector and with SunEdison to target the commercial and business sectors (like big box retailers) within select geographic markets. (SunEdison is working with Goldman Sachs, the investment house, and other financing institutions.) Grid-tied residential, commercial and business segments are BP Solar’s focus (off-grid, remote applications, not so much.) Recently, BP Solar engaged with Treasure Homes in California, leveraging the builder channel. (Unlike other cleantech marketers, BP Solar chooses to bypass, or has the fortune of not needing, the electric utility channel, going directly to consumers. That’s a good move – and another topic for another day.) BP Solar (NA) targets markets that offer the biggest solar incentives: California, New Jersey and Long Island. As for where to best leverage product in other markets, Sterling notes, “The marketplace changes, and it hasn’t been defined completely.”

The value propositions for solar PV, however, have been. To residential customers, PV is: clean, reliable, silent, pollution-free power that protects customers from the volatility of utility power…and “beautiful” deep blue, dark-framed panels. (BP did not ignore the issue of aesthetics.) BP Solar offers business and commercial customers roof systems, ground systems for large open areas, canopy systems for parking areas and walkways and building integrated PV – BIPV – in the form of rooftop tiles. The value propositions are: energy savings and other financial benefits – cost savings, protection against rising energy prices, energy efficiencies, revenue for ‘green attributes of solar (that is, renewable energy credits), and government incentives – as well as leadership in environmental stewardship. Commercial solar is (still!) emissions-free, silent and unobtrusive.

BP Solar has trademarked its programs (BP Solar Home Solutions™, BP Energy Solutions™, EnergyMax™). It is selecting qualified professional installers. Online customer support offers quotes and FAQs (though more technical information, similar to those put together by Xantrex, the inverter manufacturer, would be helpful.) Sponsorships include the BP Solar Neighbors Program™ and the Solar Decathlon (which Jeff Lyng’s team from the University of Colorado-Boulder has twice won which makes those of us in Colorado – and particularly those of us who supported passage of Colorado’s RPS – very proud.)

Whatever one might think of BP (the huge oil company, greenwashing), it is launching solar PV into the mainstream, across the collective radar screen – recognizing that clean energy is a good strategic investment for the company and its investors. In the Ceres recent sustainability investor report (“2006 Corporate Governance and Climate Change: Making the Connection”), BP scored very high in the oil/gas sector. And that’s great.

It would also be great if smaller players in this market could avail themselves of deep pockets, international brand name recognition and market share, too. Short of that, I’m hoping that BP Solar’s “continued innovation and technology gains across the solar value chain” will include next-generation semiconductor technologies to which BP can apply its ample marketing muscle – and Jeff Lyng and his team can incorporate into future Solar Decathlons!

US Cleantech IPO Filings 2006: VeraSun – Analysis of an Upcoming Ethanol IPO

Nasdaq and the US stock exchanges are not dead for cleantech IPO filings, despite the emergence of the AIM exchange in London as the place to list for cleantech, energy tech and environmental companies.

We’ve had four cleantech filings in the US this year so far, in solar, water, and 2 in ethanol.
  • Ascent Solar Technologies, Inc.
  • Aventine Renewable Energy Holdings, Inc.
  • Basin Water, Inc.
  • VeraSun Energy Corporation
I ‘m going to do a blog column on each of them in the coming weeks, so let’s start with VeraSun. You can read their SEC filing here.

VeraSun Energy Corporation (NYSE: VSE Proposed) – Filed for a $150 mm IPO on March 30. Morgan Stanley & Lehman Brothers are the lead underwriters. With $236 mm in revenues and $29. 9 mm in EBITDA in 2005, the company claims to be the 2nd largest ethanol producer in the US. VeraSun has two plants operating, Aurora, SD, a 120 mm g/yr plant, and Fort Dodge, IA, a 110 mm g/yr plant that started in late 2005. They are in construction on another 110 mm g/yr plant in Charles City, IA, and plan to build two more with the proceeds from the IPO. They are targeting 560 mm g/yr by 2008.

Their process, like most, is a corn fermentation/distallation process. They use a dry milling process, with natural gas as the fuel source and they claim on their website 2.8 gallons of ethanol + 18 lbs of distillers grain per bushel of corn.

Process summary from VeraSun’s prospectus:
“1. In the dry-mill ethanol process, the corn kernels are first ground into a flour, or “meal,” and mixed with water in cookers to form a slurry, called “mash.”
2. In the cooking system, the action of heat liquefies the starch in the corn and enzymes are added to break down the starch to fermentable sugars.
3. The cooked mash is then cooled and pumped to the fermenters where yeast is added. The action of the yeast converts the sugars in the mash into ethanol.
4. The fermented mash is pumped to the distillation system where the ethanol is separated from the non-fermentable solids (the stillage), and water is removed to concentrate the ethanol to a strength of 190-proof (95% ethanol).
5. The ethanol is further concentrated in a molecular sieve dehydrator to a strength of 200-proof (99+% ethanol), to produce fuel-grade ethanol which is then denatured (rendered unfit for human consumption) with gasoline and transferred to storage tanks.
6. The stillage from the distillation system is sent through a centrifuge that separates the coarse grain from the solubles. The solubles are then concentrated in an evaporator system. The resulting material, condensed distillers solubles or “syrup,” is mixed with the coarse grain from the centrifuge and then dried to produce dried distillers grains with solubles, a high quality, nutritious livestock feed. Some of the distillers grains may bypass the final drying stage and be sold as wet distillers grains with solubles.”

They are also selling a branded E85 fuel called VE85 in the Midwest, and have partnered with Ford, as well as GM as part of its Live Green Go Yellow marketing campaign, to promote ethanol fuels. Interesting though it is, the VE85 product accounts for well less than 1/2 a percent of current revenues.

Another tidbit, it appears that Aventine, another ethanol company which has also filed to go public this year, is the marketer/buyer of most of VeraSun’s ethanol production, despite being a competitor producing ethanol from its own plants. VeraSun has stated its intentions to go direct in 2007. Also, the company issued bonds to build its new Charles City facility, and at $210 mm in debt, is levered a serious 9.5x Debt/EBITDA until the new facilities come on line. EBITDA and Gross Margins were both down in 2005 compared to previous year, about half driven by squeezed margins in part from higher average natural gas prices, and in part from increasing SG&A from the expansions. The high current leverage has kept net income at a breakeven level for 2005.

By my back of the envelope calculation from the SEC filings, 2006, based on a full year’s operations from both facilities, an 85% capacity factor, $1.80/ gallon in revenues (ethanol + distiller’s grain), and $0.25-35/gal in EBITDA (in line with their range todate, would likely be between $350 mm in revenues and $49 – $68 mm in EBITDA, bringing leverage down to a more manageable 3-4.5x Debt/EBITDA range. in 2007/2008 with a target of at $520 mm revenue, $72-$101 mm in EBITDA on an annualized pro forma basis for the Charles City plant coming on line (estimated as 3Q 07). Pro forma for the in planning Welcome and NW Iowa plants, the numbers would be $856 mm revenues, $119-$167 mm in EBITDA.

I have not had a chance to delve into the hedging strategies. And keep in mind that those are good EBITDA margins for a refiner, and I’d expect them to get beaten down into the high single digits to low double digits like the oil industry as the industry matures. Keep in mind also that last year the company made the vast majority of its gross margin in just 1 quarter out of 4. So expect some volatility.

I then went and did a back of the envelope valuation based on this analysis.
The 12/31/05 book value /share is $3.05. So we can start there.

A quick estimate of Yr 3 Net Income, using the assumptions above, a 32 year average depreciation on assets at $1,250/ gallon installed cost x rated capacity, requirement of another $115 mm in debt to complete the build out with a 10% average interest rate, and a 39% tax rate, got a net income of between $40 and $70 mm in Yr 3.

The current valuation multiples for oil & gas refining companies are 11x EPS and 5.5x EBITDA. Using those numbers with no discount, I calculated a 2009 estimated value range after VeraSun is fully built up, and discounted that back at a 10% WACC to get a post-IPO valuation that ranged between $281 and $568 mm in equity valuation. After subtracting the $150 mm IPO raise, that leaves a per share range of c. $2.77-$8.82, depending on whether you believe the $0.25/gallon EBITDA margins or the $0.35 ones. We’ll see what the underwriters come up with. I’ll be particularly interested in what operating margin assumptions and what P/E they are forecasting. Given how hot the ethanol sector is right now, I’d expect this float to go out at the high end of my range, and probably trade well, but at the end of the day, it is a refiner, not a tech company.

Black and Green: Strange Bedfellows

Most environmentalists have a knee-jerk wretching reaction to coal. In a word, coal is “dirty”. Uncontrolled, burning coal results in about twice the carbon emissions as burning natural gas — not to mention all of the other nasties (sulfur dioxide, NOx, particulates, mercury, etc.).

So imagine my surprise when I met the other day with Kurt Waltzer, a consultant who works for the Ohio Environmental Council, who showed me a report on how coal was basically the ONLY answer for reducing carbon dioxide emissions.

The OEC recently completed a study entitled the Ohio Climate Road Map, which paints a detailed picture of how Ohio could take actions in the coming decades to stabilize the climate. Buried in the report (page 18 to be exact) is an innocuous looking chart that shows alternative climate mitigation strategies for the electric sector. Closer examination reveals the punchline: if a significant reduction in CO2 emissions from powerplants is truly required, the other emission reduction strategies often touted by environmentalists — efficiency, cogen, renewables — ain’t gonna get us there on their own. To achieve the required reductions, we need coal: gasified coal with sequestration.

In other meetings last week with coal interests, I am seeing evidence that coal supporters are beginning to get it: that the combination of improved technology AND tightened environmental stringency (along with the fact of depleting oil/gas resources) are strong tailwind forces at their back, and it may well be very advantageous for them to join the ride.

So coal may be moving towards environmentalism, and environmentalists may be moving towards coal. I’m reminded of the line from “Ghost Busters”: “Dogs and cats living together — mass hysteria!”