The Light On Blue Sphere’s Horizon

by Debra Fiakas CFA

The stakes were high at the beginning of its fiscal year 2015, as Blue Sphere, Inc. (BLSP:  OTC/QB), a developer of waste-to-energy projects, was facing deadlines to fulfill its contractual commitments to the sellers of its two ‘front burner’ waste-to-energy projects in North Carolina and Rhode Island.  In the four intervening months it appears Blue Sphere has won all bets.

Blue Sphere had purchased a biogas project from original owner Orbit Energy and had received an equipment financing commitment from Caterpillar.  Unfortunately, an equity financing source withdrew its interest as a year-end 2014 deadline drew near to make a final payment.  Behind the scenes in the final months of 2014, Blue Sphere was able to forge a new alliance with York Capital Management and its subsidiary York Renewable Energy Partners.  

The alliance was formalized through a new limited liability company, Concord Energy, in which York holds 75% interest and Blue Sphere owns 25%.  The original purchase agreement Blue Sphere had struck with Orbit Energy to buy the Charlotte project was allowed to expire and the new Concord Energy JV bought the project.  York will be responsible for financing the remaining development budget.  The original project budget totaled $27.3 million, of which the anaerobic digesters and related plant equipment represents the largest portion at $17.4 million.  Blue Sphere will be responsible for bring the project to commercial operation sometime before the end of 2015.
 

Source:  Austep SpA, a Blue Sphere equipment supplier and contractor

The deal is transformative as it appears to put Blue Sphere on track to have an operational biogas plant in the Unites States by the calendar year-end 2015.  Management indicates it has been so confident in the Charlotte project that they had continued to work closely with its engineering firm to break first ground.  A food waste supply agreement and an electricity off-take agreement remain in effect.  Accordingly, if the plant is commissioned on schedule, we expect the project to contribute income beginning in second fiscal quarter 2016.  Preliminarily, an estimated $1.0 million per year could be added to annual pre-tax income from the Concord Energy JV.
 
Blue Sphere is also working with York Renewable Energy Partners on a similar joint venture for a food waste-to-energy project in Rhode Island.  That deal is expected to close by the end of February 2015, with terms similar to those struck for the North Carolina project.  If completed on schedule, the Rhode Island project could contribute to Blue Sphere income by second half fiscal year 2016.

Management has made progress with the pending acquisition of four biogas facilities in Italy.  Due diligence has been completed and Blue Sphere has lined up financing from an Israeli private equity fund.  Thus closing appears possible within the March 2015 quarter.  After the closing Blue Sphere will own a 70% share of the Italy biogas plants, which are reportedly fully operational and profitable at one megawatt in electricity generation.  The Italy biogas plants could contribute to sales and earnings beginning in the fiscal third quarter ending June 2015.

Blue Sphere appears poised to move from development to operating stage with the pending acquisition of fully operational biogas power generation plants in Italy.  Upon closing the Company may report its first revenue and earnings from power sales as early as the quarter ending June 2015.   The report of sales and earnings should have an impact on valuation as investors gain confidence in management to deliver promised results.   We also expect announcements related to progress on the Company’s two most advanced development projects in North Carolina and Rhode Island to have a catalytic impact on sentiment toward the Company.

At the current price level, the stock is valued much like an option on management’s ability to execute on strategic plans.  However, upcoming milestone announcements are expected to shift valuation to earnings.  In a research report recently published by Crystal Equity Research, BLSP was a speculative security and therefore appropriate only for investors with strong tolerance for risk and price volatility.  More details on these recent developments and the company’s most recent financial report can be found in the report.

If Blue Sphere can reach operating stage and begin report sales and earnings, it could have a salutary effect on the biogas sector.  There are few public companies in the sector in the first place and even fewer that have operations of significance.  Even for those investors for whom BLSP presents more risk than accommodated by their investment temperament, Blue Sphere is worth adding to a watch list of the biogas sector.

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. Crystal Equity Research has published a research report on BLSP in its Focus Report Series, a sponsored research publication.  Please read the important disclosures related to sponsorship and subscriptions in the final pages of all reports.