WHITEFISH, MT / ACCESSWIRE / April 24, 2014 / There is a tight correlation between energy consumption and economic growth. The reason is pretty simple, as every good or service requires energy consumption to be produced. It may seem counterintuitive, but even continuing advancements in energy efficiency technologies does not cause the correlation to waver. This is because expanding gross domestic product requires additional energy consumption, so the impact of more efficient energy production is muted to a degree. The only time that energy use wanes is during times of recession. With those points in mind, utility providers that are tapping green technologies stand the most to gain going forward as they meet growing demand in the most profitable and earth-friendly manner for their customers. The United States economy accelerating at a 2.6% annual rate in the fourth quarter is evident in the steady rise of the Utilities Select Sector SPDR Fund (NYSE ARCA: XLU) and in companies such as utility providers Sempra Energy (SRE), PG&E Corp. (PCG) and American DG Energy Inc. (NYSE MKT: ADGE).
The U.S. Energy Information Administration is forecasting the U.S. residential price of electricity to climb 2.6 percent in 2014 from last year to 12.4 cents per kilowatt hour, lending more reason to take a look at these companies now. The areas expected to have take the biggest hit are New England and the Mid-Atlantic regions with hikes of 7.1% and 4.0%, respectively. The agency’s prediction is already starting to show as measured by the Electricity Price Index hitting an all-time high in January.
A utility holding company, Sempra serves more than 31 million customers worldwide and generated $10.5 billion in sales in 2013. Shares are up more than 20 percent from August lows as the company is grabbing investors attention for several reasons, including Sempra expanding into Mexico and South America and the U.S. Department of Energy giving a conditional go-ahead to export liquefied natural gas to countries that do not have a free trade agreement with the U.S.
Further, Sempra is broadening its already wide footprint in the alternative energy space. Last month, Sempra said that it is entering a 50/50 partnership with Consolidated Edison (NYSE:ED) on five solar projects in California and Nevada. When finalized, the two companies will split ownership of Sempra’s 250 MW Copper Mountain Solar 3 project near Las Vegas and Con Ed’s 50 MW Alpaugh 50, 20 MW Alpaugh North and 20 MW White River 1 projects in Tulare County and 20 MW Corcoran 1 facility in Kings County. All of the renewable energy from the projects has already been sold under long-term contracts.
Sempra subsidiaries also employ cogeneration technologies, developing projects big and small over the years, including a CHP plant at the Food and Drug Administration’s White Oak complex in Maryland and a central plant at Louisiana State University.
Cogeneration, often called Combined Heat and Power or CHP, is a highly efficient method of producing two forms of energy from a single source. In CHP, the thermal energy that is normally wasted and dispersed into the atmosphere as emissions during electricity production is captured and profitably used for a variety of other applications, such as space heat or hot water. The most common source fuel is natural gas, but biofuel, oils, landfill gas, etc. are all possible source fuels. Natural gas-powered CHP usage is back on the rise with the boom of shale plays in the U.S., a spate of government initiatives supporting CHP projects and because CHP energy is generated at up to 90 percent efficiency, compared to about 35-percent efficiency of conventional electricity generation.
PG&E, the holding company for Pacific Gas and Electric Company, purchases electricity from CHP facilities under the Qualifying Facilities and Combined Heat and Power Program as part of California’s goal to reduce greenhouse gases attributable to electric generation. About 700 PG&E customers are currently using CHP systems, including hospitals, prisons and the iconic Transamerica Pyramid in San Francisco.
The company has one the cleanest energy portfolio of all U.S. electric utilities, last month saying it hit a milestone for California’s Renewable Portfolio Strategy by delivering 22.5 percent of its power from renewable resources in 2013. California has mandated that renewable energy deliveries need to average 20 percent annually by 2020.
PCG is facing some potential headwinds if the investigation of the 2010 San Bruno pipeline explosion results in criminal charges, but with revenue and profit growth exceeding industry averages, the upside may still outweighs those possible pressures.
Both Sempra and PG&E offerings in California exemplify how companies make more money through efficiency, not necessarily just through selling more energy, which is good for both top and bottom lines (not to mention combating climate change). The process, known as decoupling, eliminates reasons for encouraging customers to use more energy. Rather, the California Public Utilities Commission incentivizes utilities to educate and encourage customers to use more efficient and renewable energy systems.
American DG Energy is all about CHP systems and utilizing them to reduce greenhouse gas emissions and save its customers money. An on-site utility provider, American DG Energy eliminates the one criticism of CHP by analysts and customers: upfront capital and maintenance costs, aligning ADGE for a promising future and allowing customers to instantly recognize a savings. The company’s annuity-based business model typically does not sell the equipment; it sells only the energy that is produced through its cogeneration system. The company designs, installs and maintains the systems throughout the course of long-term energy supply contracts (normally 15 years) with customers operating hospitality, healthcare, housing and athletic facilities. With its succinct business model focused on smaller-scale industrial and commercial customers, by far the largest portion of the CHP business by number of schemes, American DG Energy is demonstrating rapid growth.
CHP systems generally have a payback time of about five years, costs that American DG Energy absorbs, while guaranteeing the price the customer pays for ADGE energy to be at a 5% to 20% discount to charges from the current utility provider. After recouping initial costs, ADGE realizes a reliable, long-term revenue stream with high margins throughout the remainder of the contract.
Even with lower electricity costs in 2013, which reduce energy sale values, American DG Energy grew revenue by 32 percent in 2013 to $7.5 million, including $285,718 in incentives, ending the year with $9.8 million in cash. 53-percent of ADGE’s revenue in 2013 was derived from sale of thermal energy. Energy gross profit margin, excluding depreciation, was in excess of 36 percent, a formidable figure considering that most contracts are still in the payback stage for American DG Energy. Total energy production increased by 34 percent to 99.4 million kWh in 2013 compared to a year earlier. The expectations that electricity prices are going to rise this year should have a positive impact on increasing revenue, margins and profits for ADGE.
As a proxy of future sales and profits, it’s important that American DG expand its number of systems in operations, which it did last year. The company is now operating 123 CHP systems, a 34-percent improvement to 2012, and has 29 more systems in backlog.
The value of American DG Energy also needs to consider the value of its subsidiary EuroSite Power Inc. (OTCQB:EUSP), an on-site utility provider operating under the same business model as ADGE with its focus on the United Kingdom and European markets. EuroSite Power last week penned a 15-year contract worth $22.09 million with Topland Group. Per the agreement, EuroSite Power will be installing, owning and operating CHP systems at seven Topland Group hotels in the UK. The contract brings EuroSite Power’s total contract bookings to $89.35 million and 3,088 kW electrical capacity. In 2013, American DG Energy rewarded its shareholders with a dividend of EUSP stock.
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The takeaway here is that utility providers, especially those incorporating alternative energies, are in a prime position to deliver a solid ROI. Low-beta, dividend-paying utilities have long been recognized as reliable investments during times of GDP growth, while averting much of the volatility that other equities demonstrate. Smart investments, such as the solar projects of Sempra, clean energy initiatives of PG&E and the investment to cover initial CHP costs to realize high long-term margins by American DG Energy, set these companies apart as leaders in the utility industry.Disclosure
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SOURCE: Emerging Growth LLC
- Utility Industry
- Oil, Gas, & Consumable Fuels
- Sempra Energy