SOURCE: EquityBrief


July 09, 2013 07:01 ET

Blue Sphere Striving to Become Leader in U.S. Organics to Energy Sector

LOS ANGELES, CA--(Marketwired - Jul 9, 2013) - Sometimes exciting developments come in small packages. That looks to be the case of Blue Sphere Corp. (OTCQB: BLSP). Blue Sphere is positioning itself at the forefront of the developing organics to energy market in the United States. Blue Sphere currently is working on the implementation of two anaerobic digestion (organics to energy) projects scheduled to break ground in the second half of 2013. These two projects are slated to produce enough gas to power 8.4 MW of electricity generation capacity annually, with generation scheduled to begin in the second half of 2014. According to the EPA, there were over 202 anaerobic digestion facilities operating in the U.S. as of May 2013. In contrast Germany has over 4,000 of these plants in operation. The available market for this type of electricity production in the U. S. is enormous and Blue Sphere is now implementing its plans to develop, what it believes, are the best projects available.

Anaerobic digestion power generation plants are facilities that generate electricity from organic material. Organic materials used to power these plants include food waste, animal manure, farm waste and certain municipal waste. Food waste is the second largest category of waste sent to landfills in the U.S. This is over 35 million tons of food waste equaling over 18% of the total landfill waste stream in the U.S. This food waste is a potential supply of power that can be developed into a viable alternative supply of electricity.

The political environment in the U.S. is ripe for the growth of the organics to energy market. 31 states have passed laws mandating "renewable portfolio standards" requiring local utilities to purchase or generate a certain portion of their electricity from renewable sources. New York and California have implemented mandates that will require up to 30% of the power used in the states to be generated by renewable sources. Blue Sphere's systems not only generate power, but they have the ability to reduce the amount of waste being added to landfills, turning it into useful products, specifically energy and fertilizer.

Blue Sphere is developing and acquiring two anaerobic digestion plants in the advanced planning stages. Blue Sphere, acting as project manager, has brought on world-class partners to develop and build these power generation facilities. Biogas Nord, AG, out of Germany, specializes in designing and building organics to energy plants. Biogas Nord has built over 400 plants in Europe, Africa and the Middle East. Biogas has partnered with Blue Sphere to build the U.S. plants through Bino Sphere, a joint venture between the two companies with Blue Sphere owning 75% and Biogas Nord owning 25%. The U.S. plants will be individual companies that are owned equally by investment partners and Bino Sphere.

Blue Sphere's first project is located in Charlotte, North Carolina. The Charlotte facility will have 5.2 mega watts (Mw) of generating capacity when completed. The project has long-term agreements for organic feedstock supply, a Power Purchase Agreement (PPA) with Duke Energy, the largest power holding company in the United States, to buy the electricity generated by the facility and an agreement with McGill Environmental Systems to purchase the compost. Blue Sphere is currently putting in place the financing and expects to have the ground breaking in the third quarter 2013.

Blue Sphere's second project, located in Johnston, Rhode Island, is a 3.2 Mw bio-waste to energy facility. Once again, the preliminary organic feedstock supply agreements are in place, as is the PPA with National Grid, one of the largest investor owned energy companies in the world based in London, England and the compost off-take agreement with McGill Environmental Systems. Blue Sphere expects to break ground on this project by the end of this year.

Both facilities will generate multiple streams of revenues. The largest revenue stream will come from selling the generated electricity to the PPA partners, Duke Energy and National Grid. The second revenue generator is the "Tipping Fee," which is a fee for accepting the waste streams and operating what can the company refers to as an "endless landfill." After the organic waste is processed and the gas produced from this process is turned into heat and energy, what is left is compost, which the company will sell to fertilizer companies as a product additive. This is the beauty of the organics to energy facilities; waste goes in and energy, in the form of electricity, and fertilizer come out and both outputs are sold. This is a true clean energy production process that can be replicated many times in cities, towns, farms and ranches around the country.

When the projects are complete, Blue Sphere will own 37.5% of both facilities and will be entitled to that percentage of the cash flow, as well as a management fee for managing each facility. Blue Sphere will also be entitled to receive its project development costs back at the time of the funding close. Blue Sphere expects to start receiving revenue in 2014 from the operations of these projects. Blue Sphere's management is in the planning stage of additional facilities. They believe they can replicate the process over and over in a similar fashion, with the same partners, contractors, financiers and processes. With this approach Blue Sphere can become a leader in the growing organics to energy market over the next several years.

Blue Sphere went public through a reverse merger in 2010 to participate in the carbon credit trading markets and to develop clean energy projects globally. The management quickly realized that the carbon credit market would not develop as expected and management shifted focus to renewable energy and organics. Management did not do much marketing of the company or its stock while they were refocusing their company on the clean energy project business. Blue Sphere's primary focus is now on developing organics to energy facilities in the U.S. with their partners, although they do have some clean energy interests in West Africa with partners, as well.

Due to the nature of the changing business focus, investors have not focused on the potential value that Blue Sphere is generating for shareholders and investors. These first two projects will generate substantial revenue for Blue Sphere, possibly over $1.5 million/year with large operating margins. As Blue Sphere adds additional projects the cash flow will give management the potential for higher project ownership levels, and allow management to pursue larger facilities. With this type of revenue, and strong profitability, Blue Sphere will not have a market cap of only $2.7 million for long. If Blue Sphere can get both of these facilities up and running on schedule next year it is feasible that investors could see a significant increase in the valuation of the company. Using the assumption that these two facilities could generate $1.5 million/year for 20 years the net-present value of Blue Sphere's revenue, upon completion of just these two facilities, could be over $10 to 15 million. We will have to wait to see actual projections to conduct proper valuation analysis, but the basis for a strong company and a good investment are in place. Currently, Blue Sphere trades at about $0.003/share and has approximately 800 million shares outstanding, but management is committed to adjusting the capital structure to make it more conducive to investing. An example of adjusting the capital structure would be if management conducted a 1 for 100 reverse split, the stock price would be $0.30/share with 7.7 million shares outstanding, a structure that would benefit all shareholders.

The investor risks to Blue Sphere are mostly project related. These projects are not small undertakings. Issues could arise in the financing, permitting, construction, organic feedstock collection and operations of these organics to energy facilities, potentially delaying progress. Investors should be aware of these risks to protect themselves and their investments. Management has worked on these transactions for several years and has been meticulous about the details, but things can go wrong in any large construction project.

From where the company stands now, if it is able to launch the two current projects, and announce the upcoming projects, it is easy to believe that Blue Sphere could quickly have a valuation of $10 to 15 million. This would equate approximately $0.015 to $0.02/share, which is an increase of around 400 to 700% from current levels. The milestones investors should expect in the near-term are the announcements of a strong financing partner for the Charlotte project, the delivery of the funding for the Charlotte project, the ground breaking for the Charlotte project all in the next 3 months. The next round of milestones would be the same ones, but for the Johnston project in the 4th quarter 2013. Blue Sphere expects to generate value for its shareholders quickly between now and the end of the year. Investors would be smart to conduct due diligence into Blue Sphere quickly as the company expects it will reach the first set of these milestones by the end of the current quarter. Once Blue Sphere begins performing on these expectations investor interest will rise in this potential market leader, and it will be time for interested investors to take their initial investment positions in Blue Sphere.

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