Blue Earth, Inc. (OTC:BBLU) develops, markets, installs, and monitors innovative clean-tech technologies and energy management systems that enable customers to reduce their energy consumption, lower their generating and maintenance costs, and simultaneously create environmentally-friendly benefits. The company's target market is small commercial businesses and residences, for which Blue Earth can enhance the efficiency of building systems, such as heating, ventilation, air conditioning, lighting, and refrigeration. Blue Earth, Inc. is executing a mergers and acquisition strategy to acquire or license clean-tech and energy management businesses that complement its existing division and/or offer growth opportunities.
Blue Earth, Inc. Corporate Overview
At the present time, Blue Earth Inc. primarily consists of its two recently-acquired properties, and its involvement in two key technologies. Though more acquisitions may be in the works, a closer look at these four properties - which continue to operate or sell under their original name - paint a clear picture of Blue Earth's product, service, and target acquisitions.
Castrovilla, Inc. is an energy-efficiency-retrofit organization doing business in Southern California, Oregon, Washington, Nevada, Arizona, Utah, and Idaho. The expansion of this business will happen under the name Blue Earth Energy Management Services (BEEMS). The corporate expansion is expected to generate over $20 million in revenues and EBITDA in excess of $3 million in 2012 for Blue Earth. The net cost of the expansion during 2011 is expected to only require a limited amount of cash from Blue Earth, Inc.
Castrovilla has served over 6,000 small businesses and several utilities in Northern California. The company participates in numerous utility ratepayer-funded energy efficiency rebate programs (see 'Opportunity' section). For small businesses, it performs energy audits and comprehensive commercial refrigeration efficiency upgrades in restaurants, supermarkets, refrigerated warehouses, and other businesses, saving its customers tens of millions in utility expenses. In addition to energy efficiency retrofits, Castrovilla also has on-going contracts to provide periodic maintenance to numerous restaurants and other refrigerated facilities throughout the San Francisco Bay Area.
This unit is well-positioned in terms of capabilities and relationships with utilities and the energy services companies (ESCO) running the third-party programs.
In September, Blue Earth completed its acquisition of Xnergy - an award winning, energy services company based in Carlsbad, California - for $15,012,010 payable in 4,500,000 restricted shares of BBLU valued at $3.00 per share, and cash of $1,512,010 payable over a 30 month schedule. Xnergy was profitable on revenue of $15 million in 2009 and $18 million in 2010, respectively. Revenue for 2012 is forecasted to more than double over 2010 revenue, which was the basis of the negotiations between the parties.
Xnergy serves private and public clients from all industries throughout California and helps them minimize their energy consumption through energy savings projects, energy conservation, energy infrastructure outsourcing, and power generation, while simultaneously designing, building and implementing cutting-edge alternative energy technologies such as fuel cells and solar.
The company also provides comprehensive maintenance and service programs, including every aspect of heating, ventilation and air-conditioning (HVAC), mechanical systems for design-build to repair and retrofit services
Xnergy has been at the forefront of energy efficiency improvements and has been rated the #1 Alternative Energy Provider by the San Diego Business Journal. The organization has also received a number of awards and has received national recognition by the United States Congress for the company's "commitment, dedication and professionalism" for its work involving clean, green technology. The list of high profile clients includes Johnson & Johnson, Neutrogena, Cox Communications, Abbott Labs, Biogen Idec, The Irvine Company, John Wayne Airport, US Navy, Guidant Corporation, Pfizer, The Salk Institute, Medtronic, San Diego Zoo, Boston Scientific IVT, Harrah's Rincon Resort & Casino and the Pala Resort & Casino.
Rapid Dewatering System (RDS)
Blue Earth has an agreement with Genesis Fluid Solutions, Ltd ("GFS") to receive a 6% royalty on all gross revenues derived from dewatering operations and the sale, lease, or licensing arrangements of the Rapid Dewatering System ("RDS") and/or any of the dewatering boxes of its affiliates until Blue Earth receives $4 million and a royalty of 3% of gross revenues, thereafter not to exceed a cumulative royalty of $15 million.
The GFS patented RDS removes different types of debris, sediments, and contaminants from waterways and industrial sites, which assists in the recovery of lakes, canals, reservoirs, and harbors. The RDS system separates water from solid materials that are dredged, a process known as dewatering.
Lighting Controls Technology
Blue Earth acquired the exclusive private label and manufacturing rights to an innovative and patented lighting controls technology for a combination of restricted common stock and cash. The technology is based on distributed intelligence that embeds a microprocessor to control the "Switch" inside a fluorescent ballast. The microprocessor controls each individual fluorescent tube in either an "on/off" state using the existing wall switch to send instructions to the "smart ballast" which controls the on/off state of each tube. As important, each fluorescent tube can be optionally controlled by a wireless device, including a computer, which can control a network of lights in any given facility. The energy cost savings realized are immediate and long term.
The patented technology is an innovative, energy saving solution, that is superior to existing fluorescent dimming, for multi-lamp fluorescent fixtures in commercial, public and industrial buildings including office complexes, universities, schools, warehouses, retail stores, shopping centers, malls, sports arenas and military complexes. By simply replacing the ballast in these fixtures with the patented "switch" ballast, the end user is able to control fixtures and turn on only the number of lamps necessary for a particular application. Typically, electrical energy savings are greater than 50% and ROI of the entire system is typically less than two years and less than one year with rebates.
Corporate Acquisition Strategy
The two initial acquisitions are fair representations of the kinds of companies BBLY is looking for. They along with other targets the company is currently negotiating with are:
- Innovative and commercially-proven technologies which increase energy efficiency/water and wastewater for the small commercial business segment and residential segment.
- Energy management and energy management service companies which have an established customer base seeking growth capital to expand their capabilities and product offerings, and substantially increase their revenues and operating profits.
- Refrigeration, lighting, and HVAC companies that are installing energy efficient retrofits.
Companies that fit this description dovetail nicely into Blue Earth's stated business goals and focal points, which are:
* Bundled Retrofits. An important element of the M&A strategy is to acquire energy management service companies with an established customer base that fit the three key criteria. The customer base of each potential acquisition will present an opportunity to cross-sell bundled retrofits to the other acquired companies' customer base. For example, when BBLU acquires a company that primarily specializes in refrigeration, it will be in position to contact its customer base and offer to provide energy management services for lighting and HVAC.
* Relationships With Utility Companies. Another important criteria in choosing potential companies to bring into the fold is an acquisition candidate's existing relationship with utilities. Specifically, the company is targeting energy management companies that specialize in several aspects of utility-run energy efficiency programs including program development, program implementation, program management, program tracking, and program reporting as required by oversight agencies. Blue Earth Inc. plans to acquire innovative technologies and established, reputable energy management and energy management service companies using restricted common stock, cash, and debt in combinations appropriate for each potential acquisition.
* Continue to Maintain Entrepreneurial Approach. Blue Earth prefers to look at companies that have been built with an entrepreneurial approach. In fact, it requires that owners and operators remain involved in the business - BBLU isn't just interested in buying a business out to fund an owner's retirement. It looks for businesses that can remain flexible in designing projects tailored specifically to meet changing customer needs.
* Expand Scope of Product and Service Offerings. Blue Earth Inc. plans to continue expanding its offerings by including new types of energy efficiency services, products, and improvements to existing products based on technological advances in energy savings strategies, equipment, and materials.
* Meet Market Demand for Cost-Effective, Environmentally-Friendly Solutions. Through the company's energy efficiency measures and products, it enables customers to conserve energy and reduce emissions of carbon dioxide and other pollutants. Blue Earth will continue to focus on providing sustainable energy solutions that address the growing demand for products and services that create environmental benefits for customers.
Blue Earth will continue to utilize the brand names and trademarks of its acquired companies. The company believes that keeping the respective brand names will maintain the goodwill established with the acquired companies customer base. Acquired companies will also be identified as Blue Earth family members to build awareness of the Blue Earth brand.
Blue Earth, Inc. Opportunity
There are two key underpinnings driving the investment opportunity with BBLU. One of them is a generous rebate program that power users can see and benefit from quickly, and directly. The other is the (albeit slowly adopted) realization that utility customers as well as the utilities themselves are ultimately financially better off by conserving electricity.
Cost/Benefit of Energy Efficiency
As the race for more (and cheaper) alternative energy presses on, the expense and sheer length of time it takes to put that technology into place has made one thing clear - energy consumers are still better off by focusing efforts on not using as much energy as they are by finding an eco-friendly way of creating more of it. In fact, studies have verified it costs energy users 1/7th the amount to reduce energy consumption as it would to create that same amount in new energy-production capacity.
In other words, the best way to save money - a lot of money - is by using less energy to begin with; it only costs 14% of the price associated by increasing the potential output of an electricity supplier.
Realizing cost/benefit comparison of doing more with less as opposed to demanding more, power consumers have turned he clean-tech industry is a multi-billion dollar market made up of arenas like energy efficiency, water and wastewater, recycling and waste, LED lighting, energy storage, alternative energies and renewables, batteries/storage, smart grid electrical distribution system, alternative transportation, and green buildings just to name a few. Blue Earth, Inc. has opted to focus on the building and energy efficiency aspects of the sector.
The decision to focus on this aspect of clean-tech may be a wise one too. It has been estimated that the United States could save $130 billion per year just by upgrading or repairing its heating, cooling, and lighting systems to the kind of technology Blue Earth can install. By 2020, the U.S. will have wasted $1.2 trillion thanks to energy inefficiency.
The irony? It would only require $520 billion in equipment spending through 2020 to save that $1.2 trillion in wasted energy costs.
While it's still well shy of the $520 billion we should be spending on better energy efficiency, the target market is finally starting to come around. After spending only about $20 billion on the effort in 2010, the Lawrence Berkeley National Laboratory forecasts that between $40 billion and $80 billion will be spent on the energy efficiency front in 2020... and this is on top of the incrementally-higher spending done each year between now and then.
Yes, reducing energy usage is often an expense placed on the utility customer, while the onus of increasing capacity falls on the shoulders of the utility company. In almost all cases across the nation though, pricing regulations are structured in a way that still ultimately (eventually) passes that cost along to the consumer.
On that note, however, the incentives to reduce power consumption at the user level have more recently proven directly favorable - and increasingly so - to both utility providers as well as consumers. It is under rebate framework that Blue Earth, Inc. ha been able to thrive.
In several markets throughout the United States, local power companies offer rebates for the purchase and installation of energy-efficient products and systems like the ones Blue Earth offers. These programs are funded by utilities to foster load reductions by its customers, which ultimately (fiscally) benefits the utility company by staving off the need to add more capacity. As was noted, it costs approximately seven times as much to produce electricity as it does to save that same amount of electricity.
Though consumers still ultimately pay the full price for increased capacity, it's the utility company that has to front the money for more power plants, and it's the utility company that runs the risk of not being able to adequately raise rates to cover those costs. By rebating some or all of the cost of energy efficient equipment and installations, it's much more of an immediate win-win scenario... even for power users that don't purchase any equipment and forego a rebate.
These programs aren't doling out chump change either, and their past and future growth rates are more than a little enticing.
For instance, between 2004 through 2009, ratepayer-funded energy efficiency program budgets increased from $1.7 billion to $4.4 billion. That's a compound annual growth rate of 21.3%. This same ratepayer-funded energy efficiency spending is forecasted to swell more than 16% per year through 2015.
In 2009, of that $4.4 billion budget, these energy-efficiency programs paid back $2.4 billion in direct rebates to consumers (such as a small business owner receiving a rebate for the purchase of energy efficient motors, more efficient heating and cooling systems, LED lights, etc.).
Blue Earth, Inc. Management Team
The core of Blue Earth's growth and strength rests on the shoulders of two M&A and business-building veterans.
Johnny R. Thomas - Chief Executive Officer and President
Dr. Thomas has served as a director and officer of several publicly traded companies. He has founded and invested in several public offerings in sectors including environmental, agriculture, biotechnology, energy, and high technology. In spearheading a mergers and acquisition program, he grew the company from $29,000 in revenues to more than $350 million by acquiring thirty-four companies in approximately four years. He increased the market valuation of the company to $1.2 billion. Dr. Thomas received the "Entrepreneur of the Year" award from Ernst & Young, LLP/NASDAQ in 1998 for the Southern Nevada/Riverside, California area. Dr. Thomas received a B.S. degree in Agronomy from New Mexico State University, and a Master's and Ph.D. in Genetics/Plant breeding from Oregon State University.
John C. Francis - Vice President of Corporate Development and Investor Relations
Mr. Francis has been employed by the company since September 2010. He has served as an officer and director of several publicly- traded companies. He has founded and invested in several public offerings in sectors including environmental, agriculture, biotechnology, energy and medical. Mr. Francis's business experience spans more than thirty-five years. In spearheading a mergers and acquisition program, he grew the company from $29,000 in revenues to more than $350 million by acquiring thirty-four companies in approximately four years. He increased the market valuation of the company to $1.2 billion.
BBLU Opportunity Analysis
Blue Earth Inc. is very much a 'right time, right stock' opportunity. The annual spend on HVAC retrofits and energy-efficiency upgrades is starting to swell. It will reach as much as $80 billion per year - up from about $20 billion per year now - by 2020. Yet, the companies that are going to do this work are still fragmented. The result is inefficiency, and missed cross-selling opportunities. Blue Erath is poised to change that.
As of the latest look, BBLU is a $41 million company - a relatively small figure considering recently-acquired Xnergy did $18 million in sales last year, while recently-purchased Castrovilla is expected to generate $20 million in revenues (and an EBITDA in excess of $3 million) in 2012. That puts the company on pace to generate a top line of just under $40 million for the coming year, and that's assuming Xnergy stops its revenue growth. But, don't forget that Xnergy is expected to double 2010's top line in 2012, to $36 million. That means the company's expecting $56 million in revenue next year.
Though no bottom line figures for Xnergy were provided at the time of the buyout, the company has said it specifically targets profitable companies. If Xnergy is doing to better than breaking even (and that's a worst-case scenario), Castrovilla is still going to put $3 million in EBITDA on the company's books going forward.
Point being, there's some good cash flow here, and actual profits aren't out of the picture.
And Castrovilla and Xnergy aren't the only businesses BBLU is planning to operate. Remember, it also owns royalty rights on a rapid dewatering system (RDS) the lighting controls technology.
The lighting controls market in North America and Europe is projected to reach $3.8 billion by 2015, and ballasts represent the largest product segment of the lighting controls market in both North American and European lighting controls markets.
The Electrical Power Research Institute (EPRI) estimates that only seven percent of the U.S. commercial and industrial lighting market has installed lighting control systems of any kind, including retrofitted light fixtures, various dimming systems, and building automation products. The adoption rates are ramping up though, with 70% of facilities managers planning on increasing expenditures in efficiency programs over the next twelve months. A hefty 85% percent of these building planners intend to make efficiency a priority in their new construction and retrofit projects.
Blue Earth Inc. intends to keep acquiring product technologies as well as the companies that install them, continuing to finance the bulk of that expansion with stock rather than cash. In fact, the management team has identified several energy management service companies that have been successfully operating in the small commercial business and residential segment of the energy efficiency sector. The company believes these companies are ideal candidates from which to build nationwide distribution, installation, and service networks.
Simply put, Blue Earth Inc. is already a viable business because it's bought viable businesses operating in a segment that is on a proven growth trajectory. The word may be getting out now, of the recent chart of BBLU is in any indication. Over the past week and a half, volume has swelled as shares have jumped in value from $1.19 to $1.78. It's not the first time this type of bullish effort has been witnessed from this stock, but this second effort may be the one that's gotten the chart over key technical and psychological hurdles. In other words, the tide has turned.
With new momentum from the stock supported by a well-managed company tapping into a rapidly-growing industry, small cap speculators should invest now before more acquisition or expansion news propels BBLU any further. This appears to be the proverbial critical mass.