USA: Clean fuels energy, ¿Greener Days Ahead?

by Brian Wingfield

At first glance, the pro-environmental rulings handed down by the Supreme Court this week seem to bode unfavorably for utility companies as owners of power plants that produce harmful greenhouse gases such as carbon dioxide.

But in fact, the twin decisions could actually give a boost to energy companies that are already betting their future on investment in alternative fuel sources such as wind, nuclear and coal technologies.

The justices' rulings this week have prompted lawmakers to call for a national climate change policy, which would obviously have a long-term investment impact on industries that produce global warming emissions.

In the most publicized case, a 5-4 landmark decision, the court ruled that greenhouse gases are pollutants and are thus subject to regulation by the Environmental Protection Agency. In a second, unanimous ruling involving Duke Energy (nyse: DKE), the justices said that before making major modifications to coal-fired power plants, plant owners must have a permit, which would require that the facility be outfitted with anti-pollution controls.

Make no mistake, coal is the most abundant, cheapest and dirtiest fuel source in the United States, and because of its prevalence, it will remain the largest component of the nation's fuel mix. However, as the industry looks 10 to 15 years down the road, when federal caps on carbon emissions are likely to be in place, companies are already investing increasingly in greener technologies.

As part of leveraged buyout by private equity groups, Dallas-based TXU (nyse: TXU) recently scrapped its plans to build 11 coal-fired plants, opting instead for three coal plants that include emissions-reducing technologies. The company has also announced plans to build two "clean coal" power plants last week just as it announced the completion of a wind farm that will provide power to 24,000 homes.

Similarly, Ohio-based American Electric Power (nyse: AEP) last month announced plans to place carbon capturing technologies on two existing coal plants by 2011. NRG Energy (nyse: NRG) has proposed "clean coal" plants in Delaware and New York, and it is considering adding nuclear generation to its Texas operations within the next decade.

Atlanta-based Southern Co. (nyse: SO) is expected to break ground later this year on a test facility that will capture carbon emissions and store them underground. And last year, the company signed an agreement with the Energy Department to build clean coal plant near Orlando, Fla.

In the West, Xcel Energy (nyse: XEL) last month issued requests for proposals to expand its wind facilities in Minnesota, and the company recently announced plans to build the largest solar plant in the United States in Colorado.

According to Randall Swisher, executive director of the American Wind Energy Association, which represents the interests of the wind power industry, the court's decisions and the investment in renewable fuels illustrates the "growing consensus" that something must be done to curb global warming.

"This is going to be a good space for any investor to be in," he says of the wind industry in particular.

The unknown, of course, are the costs associated with building generators of clean and unproven technologies. For the moment, facilities that gasify coal to make it cleaner are not widely in operation, and in spite of the many permits being sought by utilities to build nuclear plants (if they wish to do so), no one has come forth with a proposal to actually build one.

"The pressure is very intense to begin considering clean coal technologies as an alternative," says James Holtkamp, a partner and manager of the environmental compliance group at the law firm of Holland and Hart. But he cautions that it is still not clear whether the decisions will push utilities into pursuing clean fuel sources.

On Capitol Hill, Democrats are already using the momentum of the court's decisions to push for mandatory limits on carbon emissions, but anything they come up with in this Congress is likely to be diluted. Conservative Democrats who were just elected do not want to risk alienating their constituents by appearing too green, and it remains unclear whether any legislation would even be signed into law by a pro-industry, outgoing president.

The court's decision gives politicians and industry leaders a clearer picture of the legal landscape surrounding climate change. However, Democrats may have better luck keeping the dialogue going through 2008, hoping that voters will again hand them control of Congress and will put a liberal president in the White House.

In any case, utilities appear to be hedging their bets early. The question appears to be when--not if--lawmakers place limits on carbon emissions.

TECH: Generating Profits by Cleaning up Coal

by Neal Dikeman (CleanTechBlog)

Fuel Tech (FTEK) is one of the fast growing public greentech / cleantech companies focused on cleaning up dirty coal.

I have known John Norris, the CEO of Fuel Tech, and his family for years, and have had the pleasure of following his career for some time. He's one of the many former nuclear engineers that grew up in the electric utility industry. He has held utility executive positions including CEO of Duke Engineering & Services, SVP and CEO of Duke Energy Global Asset Development, and Senior Vice President, Operations and Technical Services, at American Electric Power (AEP).

He took the reins at Fuel Tech early last (the stock promptly started climbing), and when I ran into him at a recent conference, filled me in on the goings on at this cleantech company that I not previously followed. I had a chance to chat with John about Fuel Tech in specific, and his thoughts on emissions technologies, carbon and greenhouse gases, and cleaning up electric utilities. I hope you enjoy.

You are relatively new to Fuel Tech, what compelled you to join the company?

I started with Fuel Tech as an Executive Consultant in April of 2005 to try to open doors with utility execs. When the Board approached me late that year about becoming the CEO, I thought about what I had seen over that last 8 months and really liked the prospects for growth. I have had the opportunity in the past to build high growth, highly profitable enterprises including one the most fun periods in my life in leading Duke Engineering & Services. This reminded me a lot of that experience, although I think Fuel Tech has even better prospects than DE&S had when I first got there.

What are the key drivers an investor should understand for the recent and continuing growth of the business?

There are several. On the Air Pollution Control (capital projects) side, investors should watch for market penetration of Ultra systems in the China/Pacific Rim market as well as a broader acceptance our all our NOx reduction technologies in the US market. They will be able to track this by watching for our announcements regarding contract wins. On the Fuel Chem (specialty chemical) side, the key driver is market acceptance by utility coal units. Again they can track this through our announcements.

And in short - what did cause the recent revenue growth?

I tend to credit the good looks of the CEO, but others do not necessarily support that conclusion. [Note to readers: John's picture is on their website, so you can judge his conclusions for yourself!] --- I think the real reason is that we have better defined our products and services and have recognized a much broader market for those services. We have a more focused R&D effort to bring solutions to client problems quickly. And it doesn’t hurt that customers are looking more earnestly for ways to reduce pollution and increase efficiency. All of these have come together for us in sort of a “perfect storm”. Still, we have to deliver results for our customers and for our investors.

Do you view Fuel Tech as part of the emerging cleantech investment theme?

Very much so, but also maybe with an important difference. Too often the greentech sector has, in my opinion, over-promised and under-delivered for clients and for investors. We aim to be a different breed in those regards.

If I understand correctly, Fuel Tech has long been a leader in post combustion pollutant reduction systems, and pre-combustion technologies are a newer business for you. Is this correct? What does the future hold? Where is the industry going?

Fuel Tech has long been a leader in post-combustion NOx control as you mention. Our Fuel Chem product line is really a combustion/post-combustion technology that helps reduce slag problems, dramatically reduce SO3 emissions (both in the boiler and across an SCR), and improve plant efficiency thus reducing CO2 emissions in the process. These latter two items have only recently (in the last few years) become important to customers. I think in the future clients will much more strongly focus on all these and other environmental and operational issues, both domestically and internationally.

Can you give us some color on the overall direction and key issues in the regulatory environment for these pollutants?

For all air pollutants the direction is towards dramatic reduction. You can sense that the whole world is looking to clean up the environment and they are not so much focused on CO2 but rather all the more serious pollutants (SOx, NOx and Hg especially).

You reported all time high international sales for 2006. How much of the business do you expect to be from overseas in the next 2 to 3 years? What has happened on that front? Has the growth been because it is a newer area of focus for the company, or because the overseas markets are growing? And how does China play into the company plan?

Our dramatic international revenue growth in 2006 really came from our projects in China. I expect China and the Pacific Rim to become a much larger part of our business going forward. China consumes more coal today than we do in the US and within a decade they will be using about 3 times the coal we use. The Chinese have now recognized the pollution issues of smog and acid-rain (from NOx and SOx emissions) and are working hard to do something about that. The upcoming Olympic games has heightened the sense of urgency to clean up the air and water. We have worked hard for a number of years to establish our credibility there and to demonstrate our technologies. In 2005 we won two major contracts to demonstrate our NOxOut SNCR and eventually our NOXOUT Cascade technologies and then earlier this year we won two major contracts to install our NOxOUT ULTRA urea to ammonia system on new plants who have the catalyst NOx control technology installed (SCR). Those wins position us well to really make this a major and growing part of our business going forward.

What about C02? In a Kyoto world, is Fuel Tech looking at C02 reduction, sequestration, or capture technologies? If so, what can you share about that?

Our Fuel Chem targeted injections can typically reduce CO2 emissions by 1 to 1.5% for coal utility plants, while dramatically reducing slag and SO3 operational issues and emissions. That may not sound like much but it very hard to make any significant CO2 reductions in plants and our reductions can be achieved while actually REDUCING plant costs. A 1.5% CO2 reduction for a 500 MW plant would be a reduction of about 8 tons/hr or about 65,000 tons per year of CO2 emissions. That is not insignificant and there is much interest in this in China and India especially where we can sell the emission reduction credits on the European Kyoto market (if done thru our Italian subsidiary).

A large portion of your business has been focused on cleaning up NOx or other pollutants at coal fired power plants. With low-carbon power likely to be a larger and larger portion of the global generation mix, what does this mean for the coal-fired pollution control sector?

While I strongly support the push for more renewable energy sources and a renewed push for nuclear power (I am a nuclear engineer as you know), the reality is that for our lifetimes and beyond fossil fuels will supply most of our energy needs. I think our company has a long and exciting future in making those energy sources cleaner and more efficient and thus making this planet a better place.

You announced not to long ago a series of company firsts, among others:

• Installation of a NOx Out Cascade System on a Coal fired boiler
• Commercial SNCR/RRI project
• SNCR lignite fired application

What does this actually mean for company?

We are looking with great haste and much effort for ways we can provide a much broader array of solutions for clients in pollution control, efficiency gains, and operations and maintenance cost reductions. We have a dedicated R&D team of our best and brightest folks focused on this effort and their work has paid off. One technology that you did not mention is our Targeted Corrosion Inhibition Program was introduced in 2006 and which is aimed at helping municipal solid waste plants dramatically reduce the corrosion rates in their boilers. Our patent in this area was but one of 7 patents applied for or granted here in the US and another 12 internationally. We are on the leading edge of technologies in these areas and we intend to stay on that leading edge.

Revenues are obviously up, and you’ve said you expect revenues to increase 20-27% in 2007, with growth from both technology segments. What about 2008, 2009 and beyond, what markets and which products do you expect to deliver the longer term growth?

We do intend to grow but have provided no guidance beyond 2007.

In 2006 compared to 2005, the gross margins were down in the NOx Reduction business, but up in the Fuel Treatment business. Net income for the 4th quarter was down year over year, even though 2006 vs 2005 was up significantly. Can you talk a little about this, as well as tell us what the long term margin objectives are for the company?

First, our revenue for 2006 was up 42% over 2005 and our pre-tax income in 2006 was up 64% vs 2005. (These results were above our guidance.) The net income (after tax) blip you mentioned is that in 2005 we recorded $4.3 million in non-cash tax benefits related to the anticipated utilization of new operating loss and tax credit carryforwards. So we believe our performance in 2006 was considerably better than 2005 and has positioned us to do even better in 2007.

You keep a healthy amount of cash and no debt on your balance sheet. What is your view on the company’s capital structure?

I love our capital structure---lots of cash, no debt, unsecured borrowing ability and a business model that is delivering rapid growth in revenues, profits and cash.

And I know you’ve had to discuss this a lot lately, but the stock price has doubled in the last year, and P/E and valuation metrics are looking rich. What is your view on how the capital markets should look at the stock and valuation?

Personally I think this is a great buying opportunity (and I just recently did so in my personal accounts). If you believe that we can and will execute our business plan and grow this company rapidly and profitably then today’s stock price is not over-valued at all. If you don’t believe that we can and will execute and achieve the results, then the stock price is already too high. It all depends on what you believe about the Fuel Tech team.

And if I was an investor interested in the company, what should I be looking for over the next 6 to 12 months?

You should be watching for contract announcements to see if we are winning in the market-place. The first quarter will be the hardest for us from a results point of view but the orders need to come over the next 6 months if we are going to deliver this year’s revenue and profit results. We are working hard to make that happen, but until the contracts are in hand it is just talk.

SeekingAlpha

Green For a Day?

by James Kanter (The NY Times)

Climate change is one of the big topics at this year’s World Economic Forum, so it is no surprise that delegates are parading their green credentials. But the worthies and grandees at Davos should watch out: There are watchdogs about.

David Miliband, the United Kingdom’s secretary of state for the environment, may have taken a Swiss train to the mountain resort rather than traveling the snowy Alpine roads in a gas-guzzling sport utility vehicle. But Gerd Leipold, the international executive director of Greenpeace, cast Miliband’s green aura in a different light.

Mr. Leipold said Mr. Miliband was belatedly jumping aboard the green bandwagon now that “it’s the direct way to becoming prime minister.” Mr. Miliband acknowleged he was “no saint” but said his efforts made him “less of a sinner.” Mr. Miliband also said he wished he had done more to build more energy-efficient schools when he was a minister in the department for education.

Iain Conn, the executive director of oil and gas company BP, described the company’s investments in renewable energy and said that he would have participated in panels on climate change before it became a topic of public concern.

Maria Cantwell, a U.S. senator from Washington state, sounded unconvinced. “I watch the BP commercials,” Ms. Cantwell said. But oil companies “are only going to move as fast as their economic interest,” she said.

One delegate at Davos who is unlikely to face any charges of greenwashing is Saxby Chambliss, a U.S. senator from Georgia. Mr. Chambliss told delegates that it was too soon to decide whether the changes in the weather were “manmade” and “something we need to be totally alarmed about,” or whether those changes were just “nature taking its course.”

NY Times