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Ray Dirks has been a respected analyst on Wall Street for decades. Ray has written two books,” The Great Wall Street Scandal” and “Heads You Win, Tails You Win”, published by McGraw-Hill and Bantam Books respectively. Dirks opened his own securities analysis firm after gaining much attention in... More
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  • Blue Sphere Gets Equal Ownership Stake In Waste-To-Energy Projects Financed By Caterpillar 0 comments
    Jan 27, 2014 11:27 PM | about stocks: BLSP, CAT, CVA, DUK, NGG

    Companies in the global waste-to-energy market earned revenues of $18 billion in 2012 and research firm Frost & Sullivan estimates revenues in the sector will skyrocket to $29 billion by 2016. Driven by the demand for renewable sources of energy and growing mounds of trash in the industrialized world, this is clearly a growth market. Private venture capital and clean tech funds, as well as billion dollar giants like Caterpillar (CAT) are investing. The World Energy Council reported that between 2011 and 2012, the increase of venture capital and private equity investment into the waste-to-energy sector increased by 186% to a total investment of $1 billion. Blue chip players and large VC and hedge fund typically have access to ground floor investment opportunities that would not be available to public investors.

    Blue Sphere (BLSP) an Israel-based energy company builds facilities that turn organic waste into electricity and it offers public investors a rare opportunity to invest in and co-own property with the Caterpillars and private funds of the world. Blue Sphere has just entered the U.S. waste-to-energy market. In 2014 the company will break ground on it first 5.2 megawatt waste-to-energy facility in North Carolina.

    Deep pocked investors are funding the build out of the facility, which already has guaranteed long-term revenue contracts. Caterpillar is providing $17.8 million in project financing. A leading green tech fund is investing an additional $6 million in project financing. This $23.8 million is non-dilutive funding for the public investors of Blue Sphere because the funding comes in the form of project financing that goes directly into the facility build out. It is not money in exchange for Blue Sphere stock.

    Blue Sphere itself does not invest millions into the facility like Caterpillar and the clean tech fund. However, it earned a 36% ownership stake in this first facility in exchange for the world-class expertise it brings to the table as project manager. This North Carolina facility is a model for how Blue Sphere will build out a large portfolio of waste-to-energy facilities across the U.S., all funded by others, with Blue Sphere keeping a growing equity stake in each one. Blue Sphere is already developing its second U.S. facility in Rhode Island and the company reports that by 2018 they plan to have 11 facilities built with 6 more under construction and development.

    This presents a very unique public company situation. Companies typically go public to raise money from public investors in exchange for stock, and then reinvest this money into growing their business, which hopefully increases the value of the company for public investors. Blue Sphere is getting its growth capital not from public investors, but from the likes of Caterpillar and private investment funds. Public investors who become Blue Sphere shareholders in effect become co-owners of the facilities alongside Caterpillar.

    North Carolina is just one project and Blue Sphere is looking to build many more. Building them becomes easier when you have guaranteed long term revenues contracts from some of the largest utility companies in the world. Major utilities including Duke Energy (NYSE:DUK) and National Grid (NGG) have both signed 15 year contracts to purchase electricity produced by Blue Sphere. In building out the rest of its portfolio of facilities, Blue Sphere plans to have similar financing and contracts from companies of similar caliber.

    The U.S. market is ripe with opportunity now for waste-to-energy. Blue Sphere's focus on converting food waste into energy is a $6 billion global market and one of the fastest growing segments in renewable energy and waste-to-energy. There are only 202 anaerobic facilities where organic waste is turned into electricity in the entire U.S., whereas there are 7,000 in Germany alone. U.S. states are mandating that organic waste no longer be disposed of in landfills and that electric utilities buy a certain percentage of their electricity from renewable generated sources.

    This is an opportunity for investors looking to take a position in the booming waste-to-energy market. Looking at other public companies that are active in the space, Waste Management (WM), the waste industry giant, reports it is engaged in some waste-to-energy projects. However, that only accounts for a small portion of its revenues. Covanta (CVA) has a $2.3 billion market cap and specializes in the conversion of waste to energy. However, Covanta is primarily engaged in solid waste like metal and plastic, not organic food waste. Covanta recently announced in October that through a partnership, it will start to offer organics to waste services in response to demand from municipalities.

    Blue Sphere, with its $2 million market cap has a great opportunity to grow into a $2 billion market cap like Covanta. It is a rare occasion when public investors can participate in this kind of potential upside, starting at the ground level alongside billion dollar players that are providing non-dilutive growth capital.

    Caterpillar, Duke, and National Grid have very likely done extensive due diligence into Blue Sphere before signing these high-value, long term contracts with the company. The fact that Blue Sphere locks in revenues with the largest utilities like Duke and National Grid through long-term power purchase agreements, even before the waste-to-energy facility has broken ground, creates low risk, high return projects, and the enables fast growth of Blue Sphere's portfolio.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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