K-Fuel, "one Answer". Recs: 2 K-fuel and politics
Evergreen has never been very proficient in the way in which they communicate with investors, and last week’s announcement of the Ft. Union plant closure was no exception. I’ll be the first to admit that they have made a number of serious tactical errors along the way. But don’t let that cloud your vision. K-fuel remains the “holy grail” of coal, and they could be selling a billion tons of it at a substantial profit, if only they had the production capability.
We could argue all day about whether the engineers or management should take responsibility for the design shortcomings of the Ft. Union plant. It probably doesn’t matter much anyway, as good investors tend to focus on future profit potential. With that in mind, let’s take a harder look at the REAL reason those new domestic plant deals have been held up.
I believe that some of us in the investment community are guilty of creating a rather “unreceptive” environment for Evergreen to feed us anything but good news, a practice intensified by all the plant delays and falling stock price. The end result seems to be a serious lack of good balanced information readily available to investors, and what little information Evergreen does release is instantly twisted and distorted out of context by the shorts. This has convinced Evergreen to further constrain the flow of information, almost eliminating the possibility of most small retail investors knowing what challenges and opportunities are REALLY facing this company. From the outside world, we keep getting told that there are lots of big deals in the pipeline, and the shorts are very quick to point out that none of those deals ever seem to emerge. Perceptions like that aren’t ignored by investors, and it helps explain why this stock has fallen so far since Evergreen first started to experience significant production ramp-up delays roughly two years ago. There also can be no doubt that these delays have had a serious negative impact on the prospect of new plant sales. HOWEVER, my own belief is that the biggest reason none of those big deals have materialized yet has to do with Washington politics, not production problems.
If you never noticed before, Evergreen has a “Policy Issues” section on their web page, which I suspect is probably ignored by most investors. (including myself.) It briefly discusses various government regulations regarding coal emissions, but is seldom updated, and doesn’t well correlate the current status of government policy making with specific issues related to the prospects for K-fuel in the marketplace. This should come as no surprise, as the situation with Uncle Sam is so fluid that even some of the analysts have given up on trying to figure out where the government is headed with coal emission regulations. In response to this, large power companies like TXU have found it necessary to maintain a small army of lobbyists in Washington, and they STILL haven’t completely figured out how the upcoming set of emissions regulations will impact their businesses.
I personally believe that Evergreen prefers to keep quiet on the matter of government policymaking, for fear that it is a moving target, and any serious discussion will only confuse and frustrate most investors. I disagree with that strategy, I think most investors are reasonably intelligent, and deserve a good discussion of the topic:
Two major federal government initiatives currently moving through congress confront Evergreen’s potential K-fuel customers: Section 45 tax credits for refined coal, and mercury emission reduction requirements. A year ago this situation seemed clear, giving Evergreen some serious hope for definitive customer agreements, but a lot has since happened in recent months to cause power plant operators to forego any decisions with regards to investing in new emissions technology. In other words, it would be foolish to blame Evergreen management for delays in signing definitive agreements; power plant operators have a strong presence in Washington, but their influence is limited, and the overall regulation situation is still a bit murky.
Don’t believe me? Look at the facts. Roughly a quarter of the K-fuel production costs were expected to be offset by the so called “Section 45 tax credits” which have already been signed into law. The tax credit concept effectively subsidizes the production of cleaner burning coals, like Evergreen’s K-fuel. Unfortunately the lawmakers who wrote the law did such a lousy job with the wording that the IRS has been unable to interpret its exact meaning. The law stated that to qualify for the tax credit the refining process must increase the base feedstock market value by 50%. But what exactly does that mean, especially in light of coal prices that have been rapidly increasing? The IRS can’t figure it out, so they sent it back to the politicians for official clarification. From what I’m hearing now, the Senate is leaning toward a more specific definition of refined coal which requires specific emission reduction targets - a 20% NOx reduction and 60% Hg reduction. These new goals ARE WELL WITHIN the range of K-fuel’s capabilities, but the new law has yet to clear both the House and Senate. Once again, you can’t blame Evergreen for the delay, and you can’t blame the utilities for stalling on K-fuel deals until Washington’s new tax credit laws are written in stone.
Now let’s talk about the mercury laws, which are also unfortunately stalled in Washington. A few years ago our Washington lawmakers came up with a new mercury reduction law, called CAMR (Clean Air Mercury Rule). It was essentially a nationwide cap-and-trade program designed to substantially reduce the overall amount of mercury spewed into the air by power plants, comparable to the existing successful NOx and SO2 cap-and-trade programs. However, this past winter CAMR did not stand the test of judicial review, apparently conflicting with an existing EPA “clear skies” law. CAMR also created some controversy, given that it has so much flexibility that some power plant operators could avoid taking ANY action to reduce mercury emissions by simply buying credits from another power plant which cleans up mercury beyond the required limits. Unfortunately that doesn’t work very well for the people that are located in the backyard of a power plant that decided to buy emission credits rather than significantly reduce their mercury emissions.
At the present time there seems to be a growing consensus among power plant operators that whatever new mercury law comes out of Washington, it will be stricter than the original CAMR law. However, with regards to exactly what that new law will require and when exactly it will emerge from Washington is still not clear. I think Evergreen was hoping for a deal THIS MONTH, corresponding to the 45 day judicial review process after CAMR was officially struck down on February 9th, thus explaining why they decided to delay their earnings announcement until the last possible minute. The theory was that the Department of Justice would provide the EPA with some clarification regarding what they could legally do, and armed with that information the power plant operators could better anticipate their exact needs for emissions reduction products.
At this point I don’t know if the power plant operators have enough clarity to start signing definitive contracts for cleaning up their emissions, but I wouldn’t rule out something happening very soon. None of these power plant operators want to end up at the back of the line in the proverbial “Emissions Clean-up Store”, and some are even rumored to be working on off-take agreements with potential suppliers that need to increase their production capability to meet all the new expected demand.
To complicate the decision making process, several states have been drafting their own new mercury reduction laws, apparently tired of waiting for something concrete to emerge from Washington. The future of some of those state laws are clear as mud, given that they must eventually be legally compatible with whatever Washington decides. Now you can better appreciate why many of these power plant operators have been “shopping, but not yet buying” emission control products. Power generation is a very competitive business in most parts of the country, and the bean counters are not likely to spend a single nickel above what it takes to meet future environmental regulations which have yet to be clarified.
Given the current situation in Washington, I believe Evergreen made the right decision by shutting down the Ft. Union plant. More than 100 coal/lignite samples from around the world have already been processed at that plant, and the product has performed as advertised. There can be no question that all of the past Ft. Union ramp-up problems have seriously impacted Evergreen’s marketing efforts. However, with all of the successful independent test burns of the product, it seems more clear than ever before that K-fuel performs as advertised. The only really big remaining question is the exact value of K-fuel in the domestic marketplace, which depends heavily on the specifics of the laws emerging from Washington. In other words, how can a power company make a big new plant deal with Evergreen until they have a darn good idea how valuable K-fuel will be to their specific operation? Fortunately, the answers to those important questions are starting to be answered.
Your next question is probably going to be: “Well how long will it take Washington to finish their work?” The truth is that nobody knows. It does however already seem clear that the new Section 45 tax credits will be specific enough for the IRS to manage, and that the new mercury law will be more strict than the old CAMR law. All of this will be good for Evergreen.
The shorts would like you to believe that Evergreen will run out of money long before they get a plant deal, but there is a lot of evidence that won’t happen. Evergreen has their own mining subsidiary, and the price of coal has been skyrocketing lately. Evergreen’s “Buckeye Industrial Mining” operation is ramping up fast to take advantage of increasing coal prices. There is even some new evidence that they are gearing up to fulfill a huge contract with a new coal-to-liquids plant that will eventually require somewhere in the area of seven million tons per year. That is a LOT of coal. The bottom line is that with tens of millions of dollars in the bank, significantly reduced expenses at Ft. Union, and cash rolling in from Buckeye, Evergreen isn’t going to go bankrupt waiting for Washington to finish with their new coal emission laws.
We also can’t forget about the potential for C-Lock. That subsidiary is gaining traction in the marketplace fast, and I expect to hear about their first deal in the first half of this year. I seriously doubt if C-Lock is going to be cash flow positive this year, but with IBM on their side, and new C02 regulations on the horizon, this new enterprise has great potential for worldwide revenue. If the delays in Washington persist for an extended period of time, Evergreen could simply sell C-lock and live off the proceeds. No matter how you look at it, Evergreen isn’t going out of business anytime soon.
Do you want another GREEDY reason to invest in this company? Consider the barriers to entry in this marketplace, and the progress Evergreen has made to date. Between those first two plants, investors probably spent about $200M, and a huge sum of money like that will discourage most newcomers from entering the business. To the shorts, that $200M looks like lost money, but long term investors know that a tremendous amount of know-how has been gained from those original investments. Let’s face it, this clean coal business is new territory for everybody, so you have to expect a few hiccups along the way.
One thing for sure, Bechtel certainly wouldn’t be interested in building plants for Evergreen if they had any serious reason to believe that BECHTEL’S new plant design wasn’t going to perform as advertised. Bechtel is not a street urchin willing to take a buck from anybody. Bechtel’s business depends on building and maintaining their reputation for building large projects that meet the original design criteria, while also meeting their customer’s schedule and budget requirements. Having a contract with Bechtel to build the first billion dollar’s worth of K-fuel plants is a very good development for Evergreen.
A couple decades of work has gone into developing the K-fuel concept, and a couple hundred million has been spent coming up with a viable plant design. Yet, at a current market cap of little more than $100M, EEE stock is a screaming bargain. Although potential domestic K-fuel product margins still depend upon whatever comes out of Washington, they sill look DARN good, somewhere in the area of $15 - $20/ton, perhaps even more.
So don’t get too hung up on that recent closure of Ft. Union. That’s just a prudent step that was necessary to preserve cash until the dust settles in Washington. K-fuel has already proven itself in numerous independent customer test burns, and there is still great interest in the product. Also consider that whatever ultimately happens in Washington has little impact on potential opportunities overseas, most notably the Indonesia deal which Evergreen has been working hard.
The bottom line is to be patient. This company is still on track to make investors a LOT of money, and the stock is a real bargain at these low prices. If you don’t believe me, just look at the current price targets by the independent analysts that follow this stock. Their price targets vary all over the map, between $4 to $14.50 . (I suspect much of the variance is due to a lack of visibility regarding exactly what is going to be coming out of Washington.)
https://finance.yahoo.com/q/ao?s=EEE
Anyway you look at it, those analysts agree with me that Evergreen is worth multiples of what the stock is currently selling for.
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