Get Ready for the Power Play
During the past 30 years, the ecoTECH Energy Group, Inc. has developed and refined its proprietary thermal gasification technology to create clean-burning waste-to-energy cogeneration power stations which would provide optimal revenue performance with minimum environmental impact. The Company’s combined heat and power (CHP) technology produces electricity, which can be channeled to utilities and end-users via the Grid, and heat which can be used to fuel torrefied biomass briquette manufacturing facilities, allowing for a “green fuel” offering and related revenue stream. Additionally, ecoTECH has acquired the licensing rights to adjunct technologies (hydroponic harvesting, aquaculture, cold storage, etc.) which, when requested, can be coupled with the power stations to provide cost-effective solutions for rural community needs.
Leveraging its proprietary technology and a unique business model, ecoTECH is poised to become a major provider of biomass-fueled power stations in North America and biomass-based alternatives to coal to customers abroad, which could generate in excess of $600 million in annual revenue in 10 years.
Driven by government mandates and incentives for the huge proliferation and utilization of renewable energy and fuel, ecoTECH’s business model and three-pronged strategy are primed for success. This model includes:
Image I. CHP Bio-Energy Power Station
Source: ecoTECH Energy Group, Inc.
Using local wood waste biomass, these projects would provide electricity and fuel products to multiple communities, with excess energy production available to external utility companies and energy brokers which can be transferred easily via the Grid infrastructure. In addition to utilizing the Company’s proprietary technologies, these projects will also incorporate proven technologies created by external parties with which the Company has partnered.
Each station consists of a traditional two-stage thermal reactor which utilizes proven proprietary pulse-jet technology and “off the shelf” boilers and turbines. The stations are built in 12MW modules (or “Pods”) for simplicity in expansion and redundancy. This compact and scalable design provides flexibility for various sized projects.
ecoTECH’s waste-to-energy power stations combine technologies to effectively process and convert biomass and other feedstocks, under environmentally friendly conditions, into electricity. ecoTECH’s proprietary design uses multiple fuel stocks and produces higher mass-to-energy with almost zero harmful emissions to the environment.
For a typical 36MW Power Station: approximately 460 tons of biomass feedstock would be processed each day (during one eight hour shift) for 260 days per year, yielding 130,000 tons of fuel annually – enough electricity to provide 36 megawatts per hour, 24 hours per day, for 365 days per year (approximately 315 gigawatts per year). This is enough electricity to power 40,000 homes at average North American consumption rates.
Importantly, the Company has entered into long-term agreements for sources of woody biomass in the U.S. and Canada, including with Native American groups in these regions. Currently, contracts and/or letters of intent have been secured from North American sources which account for multi-year fiber supply in excess of 1.5 million tons biomass feedstock per year.
Torrefied Wood Briquettes
Torrefied briquette plants are powered by surplus heat and energy generated by the CHP Power Stations. The “green-fuel” that is produced is a wood-based “clean fuel” product that has been torrefied and pelletized, resulting in a highly-condensed wood fuel product which has roughly equal calorific value as standard coal and can be burned in the exact same manner but with greatly reduced emissions.
Image II. Torrefaction
Source: ecoTECH Energy Group, Inc.
Other Business Lines
We estimate that the first $6M payment will occur sometime before year-end 2011, with $24M booked in 2012 and the remaining $6M in 2013. This deal is great for cash flow as it provides the Company with 37% gross margin and cash flow heading into its financing for the power station projects. We expect that the Company could leverage this contract into similar contracts in Latin America as well as using it as an entry point to replicate its CHP Power Station business and its torrefaction briquettes sales.
THE RENEWABLE ENERGY MARKET
The renewable energy industry is expected to reach more than $250 billion by 2017. Worldwide initiatives and government mandates including the 2009 American Recovery and reinvestment Act are driving the implementation and utilization of renewable sources of energy and fuel. As noted above, Europe’s use of biomass as a source of energy is expected to rise tenfold in ten years. Global power generated from biomass, the most renewable energy source in the world, is expected to grow from roughly 1% 3 years ago to nearly 6% in 2035, fueled in part by co-firing – a process in which biomass is mixed with coal in coal-firing plants.
Coal remains the primary source of electricity production worldwide, representing anywhere from 30-80% of all production in the developed world. With the desire to lower carbon emissions, the use of biomass on a large scale, such as ecoTECH’s model would enable countries, regions, municipalities, and major corporations to reduce dependence on fossil fuels while meeting all of their power needs. It should be noted that each ton of ecoTECH briquettes that are consumed reduces the CO² output by 2.5 tons.
Although the timeline of production and financing is somewhat fluid, we believe that management’s expectations are reasonable.
2012: Groundbreaking of 35MW facility in Montana
Combined, these 5 power plants could produce in excess of 1.5 million Megawatts electricity and 1 million tons green-fuel annually, and generate in excess of $600M in annual revenue by the end of 2015.
ecoTECH has a number of advantages over other renewable energy providers. In addition, management has built an effective, powerful technology platform that should serve as a barrier to growth for smaller firms and a barrier to entry for new companies.
In our view, ecoTECH’s biggest risk is the timing of long-term financing and construction delays. The Company already secured a very impressive $36M contract which, along with government mandates and incentives in the targeted locales should enable ecoTECH to overcome financing issues that would torpedo other firms. Execution risks could push meaningful revenue generation out to a later date, or in a smaller initial ramp, thus impacting revenue and product sales goals. Slower sales penetration as a result of competition from larger firms or even from newer entrants is a typical concern and is also consistent with firms of ecoTECH’s size and standing.
Colin V. Hall, Chairman and Chief Executive Officer
Over the past 15 years his abilities have been directed towards the development of fully integrated systems for energy production and waste management, reduction and processing. He is a recognized expert in the design and development of environmental control & processing systems. He led the development and promotion of the Western Renewable Fuels project for four years in the 1990’s. He designed the integrated waste-to-energy system, (the Mark V Phase Conversion Thermal Reactor), and has made many improvements on existing designs for components of environmental remediation systems.
Barry Sheahan, C.A., Chief Financial Officer
He was associated with the Clean Energy Group of companies for eight years, initially as a public accountant and consultant, and served as the Chief Financial Officer and a director of Clean Energy Combustion Systems, Inc., a public company, until 2006.
Since early 2010, Mr. Sheahan has served as CFO of the Ansan Group of Companies, involving several privately-owned companies which together form the largest traffic management service provider in the Lower Mainland. During Mr. Sheahan’s tenure at Ansan, the company was awarded and successfully operated the traffic management for the 2010 Winter Olympics and has also initiated a paradigm-breaking province-wide contract with TELUS Communications Inc. to provide traffic management services throughout the Province of British Columbia.
Stuart Mason, Chief Operating Officer
As team leader and “trainer of trainers”, Mr. Mason has designed and implemented material handling and damage control systems which have delivered millions of dollars in annual cost savings for companies he has represented. Mr. Mason was also responsible for ensuring the facilities were in compliance with North American Transportation Regulatory Guidelines.
Terry J. Ferguson, Executive VP Business Development
The SEI Bambi Bucket helicopter fire-fighting system was the winner of the Manning Award for the best new technology in Canada in 1986. Other products included fuel and water delivery and storage systems for remote locations. Terry Ferguson is experienced in the computer industry, including sales and marketing of hardware, software and systems integration products and services. In the late 1990’s Mr. Ferguson was instrumental in researching and analyzing costs, viability and logistics for several projects with the Biozyme Group, including a multi-vessel krill fishing project in the Antarctic and a fisheries waste recovery plant in Prince Rupert, BC.
John Matthews, Executive VP Engineering
Mr. Matthews brings a wide range of technical management and manufacturing experience to the Company. He has worked with designer and ecoTECH CEO Colin Hall for over 30 years, gaining experience in Europe, North America and China, acting as technical liaison officer and executive engineer for a wide range of products and projects.
Anne Sanders, VP Administration
Hollie E. Parrow VP Finance, Montana Division
Larry Wilbert, VP Operations, Montana Division
As noted above, it is difficult to forecast revenue for the Company at this stage, but we expect that once ground is broken, we will have a better sense of timetables, financing costs, and milestone events, of which we believe there will be many in the coming weeks and months. We forecast $6M in revenue for 2011, with $24M in revenue (from the Ecuador deal), although that number could rise substantially, should the Company secure similar contracts. Our expectation, based in large part by current mandates, incentives, and market opportunities, is that ecoTECH will secure large-scale, debt-based, project funding for the power station and related facilities. However, since we are uncertain of timing and terms, we prefer to use preliminary revenue and EBITDA figures for 2013, which will be reviewed and updated in the coming months. Our estimates call for $170M in revenue for 2013, with $80M in EBITDA. It should be noted that unlike most power facilities, ecoTECH’s model does not require a large number of personnel and enjoys a high gross profit margin. This margin is a direct result of great long-term biomass procurement deals and is likely further enhanced from torrefied briquette sales.
VALUATION AND CONCLUSION
In our view, ecoTECH has significant, inherent advantages in the space, starting with its strategy and model, and is a credit to management’s vision. As a result, the heavily undervalued and relatively unknown ECTH is a great way to play the green energy space. Investors should expect considerable profitability once the Montana and British Columbia facilities are up and running, along with replication of the model in multiple markets. The stock is likely to be news-driven in the near-term, but a number of milestones, including financing, receipt of the $6M Ecuador payment, and other events, should drive the stock to $1.25 in the coming months, as the Street begins to learn the ecoTECH story. On a longer term basis, we believe that the stock could approach $3.50 in 18-24 months, based upon 4x our preliminary FY13 revenue forecast of $170M and 8x our FY13 EBITDA forecasts. We rate these shares Speculative Buy.
Analyst: Robert Goldman
Rob Goldman has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell-side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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