Thursday, 21 August 2014
Last updated 38 min ago
Feb 17 2009 | 9:17am ET
By David Kurzman -- Not all companies are affected negatively by the current financial morass. Many companies have staying power, or defensive qualities that allow them to survive through financially turbulent markets. A select few will actually thrive, experiencing accelerated growth due to the nature of their business models, characteristics of the markets in which they operate, or their ability to acquire talent at below-market rates.
We recently added one such company, EnerNOC Inc. (Nasdaq: ENOC), to the Kurzman CleanTech Research© Strategic Portfolio at $9.44 a share because of the high likelihood that they will not only benefit, but thrive, in the current market due to their unique business model and their management talent. EnerNOC provides a source of cash flow for businesses and institutions, and management has a stated goal of achieving positive operating cash flows in the second half of 2009, which should serve as a catalyst for the stock in the near term.
EnerNOC is paid “capacity payments” by utilities to identify and enroll corporations and institutions in demand-response (“DR”) programs. DR programs pay electricity consumers to curtail their power usage during periods of peak demand, or whenever the grid is stressed by outages, weather-related events, or seasonal increases in demand. EnerNOC splits the capacity payments with its enrollees, provides advanced warning of curtailment “events,” and manages the relationship with the enrollees. As companies and institutions seek ways to replace revenues during this economic crisis, it is likely that EnerNOC will experience a period of increased enrollment in its DR programs. Revenues look set to rise 70% to 80% in 2009.
Utilities participate in DR programs because they allow them to delay costly construction of new power plants. Given the current lending environment, obtaining financing for new construction is unlikely anyway, and permitting for new power plants tends to generate significant consumer backlash. Operating power plants is expensive, comes with associated risks (primarily rising fuel and labor costs), and financial returns are regulated at fixed rates. So when faced with the choice of whether to build a new 100-Megawatt “peaking” power plant for hundreds of millions of dollars, or to pay a DR provider annually about one-tenth or one-twentieth of that cost to curtail 100 Megawatts of demand, the decision tends to favor a DR solution.
The demand response business model is a bit like the property and casualty insurance business turned upside down: instead of having a large pool of consumers pay a few insurers to cover the cost of an “event,” there are a few utilities paying a large pool of consumers to prevent events. In short, the utilities pay a pool of electricity consumers to insure grid stability through periodic reductions in consumption. These events can be due to planned maintenance outages, storms, or peak-load periods (i.e.: hot summer days when regular electricity demand coincides with air conditioner use).
When the economy is strong, EnerNOC actively pursues companies to enroll in DR programs, but during periods of economic distress, it is likely that an increasing number of commercial and institutional electricity consumers will proactively contact EnerNOC to secure alternative methods of achieving a financial return on their unused production capacity. Then human nature is likely to take over and most enrolled companies will renew with the same DR provider as their contracted periods end.
Once a company or institution is enrolled in a DR program, they receive quarterly checks from EnerNOC, even if no event is called. When an event causes EnerNOC to curtail consumption, smart-grid equipment installed at the customer site will attempt to achieve the reduction in energy consumption through non-invasive methods: cycling HVAC systems, selectively turning off certain lights, or adjusting temperature settings slightly. For the reduction in energy consumed, the client will receive an additional “energy” payment for their curtailment efforts, though this amount tends to pale in comparison to the quarterly capacity payments.
EnerNOC also cross-sells its energy-management and procurement services to enrolled companies, seeking to share in the savings they generate. These sales tend to be exceptionally high margin, and are likely to be the fastest growing portion of revenues for the foreseeable future.
Shares of EnerNOC could rise to $20 by year end 2009 as management leverages its fixed infrastructure to generate high incremental profits. The subtleties of the business model, though, are numerous. For instance, EnerNOC operates in a number of different power delivery regions (ISO New England, PJM, ERCOT, etc.) and offer a series of different curtailment options. This can make for a very complicated story to understand, and as we review the current sell-side research available on the company, it is clear that significant confusion remains.
Your feedback is welcome. Email your thoughts to DK@KCResearch.com.
David Kurzman is Managing Partner of Kurzman CleanTech Research and Kurzman Capital. Prior to launching his consulting firm, he served as Managing Partner of Kurzman CleanTech, a five-year-old hedge fund investing in clean technology companies and led the CleanTech Research Group for Panel Intelligence, a primary research firm.
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