Jan 15, 2013
Best-Case Scenario Secured; EPA Supports
Use During Emergencies; Reiterate
Outperform and Raising TP to $19
■ Bottom line: The EPA released a “best case” final ruling on emission
control requirements for backup diesel generators (RICE NESHAP),
removing the largest overhang on ENOC shares. The final ruling is the bestcase
scenario we outlined last week as EPA is allowing up to 100 hours of
generator use for emergencies, which should have no impact to EnerNOC’s
financials. Many had feared the ultimate ruling would not allow the use of
backup generators, however EPA recognized the value of the emergency
resources to protect grid reliability.
■ Increasing target price to $19 (from $16): With the increased visibility and
confidence on our earnings estimates, we increase our target price to $19
(from $16) reflecting 4.5x 2014 Adj EBITDA. We continue to see the stock as
undervalued, trading at just 3x our 2014 EBITDA with limited capital needs.
Even at $19/share (26% upside from current levels) the stock would reflect a
22% Free Cash Flow Yield on our 2014 estimate.
■ The details: Emergency generators can be operated up to 100 hours per
year during emergency events (Level 2 situations or when voltage drops 5%)
which is effectively the dispatch signals for most resources. Starting in 2015,
generators that run more than 15 hours per year will have to use Ultra Low-
Sulfur Diesel (very minor cost) and will have to keep a log of operating dates
and times. While peak shaving will be limited, this is not significant for
EnerNOC. Upset parties may challenge EPA’s rule, but given the extensive
comment period and exhaustive debate throughout the process, we believe
that any challenges are unlikely to have merit.