Whitefish, MT / July 24, 2014 / On June 2, the Environmental Protection Agency released a much-anticipated proposal representing the most aggressive steps to slow global warming to date by the U.S. government. In the proposal, the EPA seeks to slash U.S. carbon dioxide emissions by 30 percent by 2030 from 2005 levels. Although the pro-coal community has been firing back, calling the proposal too idealistic, a shot at the America’s middle class and more, the EPA has gone to virtually unprecedented lengths to make the new policy as accommodative as possible to states. With that in mind, it seems pretty clear that the new regulations are coming, like it or not. The stricter emission standards are going to continue to weigh on companies such as Walter Energy (NYSE: WLT), Peabody Energy (NYSE: BTU) and more of their coal brethren, but the bleeding may get worse before it gets better, considering actions such as Stanford University divesting its $18.7 billion endowment of stock in coal mining companies in May. Part of Stanford’s decision to become the first major university to walk away from its investment in coal was predicated on internal guidelines of trustees to make decisions on investments based upon social responsibility. As funds exit “dirty” energy, it seems plausible that increased investments will start to make their way towards more efficient energy, including natural gas and related products, such as the combined heat and power offerings of American DG Energy, Inc. (NYSE MKT: ADGE).
Coal stocks have been treated like the whipping boys of Wall Street in recent years, provoking analysts at UBS to say that it may be time for some of these companies to consider bankruptcy as it looks ahead two or three years, although the firm says that it doesn’t see any “imminent” bankruptcies from majors on the horizon because of strong cash positions. However, consider that James River Coal (OTC: JRCCQ) and Patriot Coal have filed for bankruptcy protection in April 2014 and July 2012, respectively, giving way to the pressures of the deteriorating industry.
Analyst Kuni Chen of UBS noted that Walter Energy, whose shares are down about 70 percent in 2014, has $430 million in cash and cash equivalents on hand. That is a weaker position than many of its peers, equating to the company likely running out of cash by the end of next year. With most of its liabilities consisting of secured long-term debt, Walter may look to exchange offers or concessions out of bankruptcy to restructure, but the company always could go the route of a Chapter 11 in anticipation of higher recoveries, according to Chen.
Peabody Energy, which is down about 16 percent this year, is in a better cash position, with more than $1 billion in cash and cash equivalents that should carry the company forward for the next three years. Six billion in debt aligns Peabody for a potential recapitalization of its balance sheet through an equity raise to weather the headwinds of a fleeting seaborne coal market should prices remain under pressure. Peabody’s large market capitalization of $4.4 billion allots the company options for a substantial raise to help its net leverage and debt-to-capitalization ratios. While a recapitalization won’t exactly put Peabody in a prime financial position with the current coal trend, any resurgence in coal may provide the company dry powder for possible acquisitions.
UBS downgraded Peabody Energy from “buy” to “neutral” in late March and followed that with downgrades of Walter Energy, Arch Coal and Alpha Natural Resources (NYSE: ANR) from “neutral” to “sell” in April.
Experts predict that if the proposal becomes law, that natural gas will supplant coal as the most commonly used fuel for power plants by 2030. While the jump in usage won’t be nearly as dramatic, renewable resources should also see a rise. The key here is clean, reliable, inexpensive energy, which is the reason why combined heat and power, or CHP, could see a boon in usage going forward.
CHP is exponentially more efficient than traditional energy, generating two types of energy from a single source. In the case of American DG Energy, the company utilizes natural gas to power engines to create on-site electricity through its CHP system. The heat that is created during the process, which normally wafts to the sky, is captured and re-purposed for applications such as space heat, hot water or even to power chillers for air conditioning. This two-for-one technology results in about 90 percent efficiency, compared to roughly 33 percent efficiency for legacy electricity generation, while also reducing emissions.
The value to ADGE customers is two-fold as well, helping companies operate in a more environmentally responsible fashion and, importantly, save money on their utility bill. Because American DG Energy is employing the “waste heat” from generating electricity for another energy need, the overall cost of the source fuel (natural gas) is spread out across two utilities that the customer would typically be paying for monthly. It’s simple math from that point, allowing ADGE to guarantee its clients will save between 5 and 20 percent on their monthly utility bill compared to the cost of gas and/or electric from their current local utility provider.
In order to achieve optimal efficiency, American DG Energy focuses its sales efforts on specific businesses where there is a high demand for hot water to optimize the ratio of electricity created to thermal energy demand, such as those in the hospitality, education, healthcare, housing and corrections, fitness industries. The company has over 120 systems in operation (with a backlog over 30%), split almost evenly amongst these industries.
Critiques of CHP systems have never been about the operational efficiency of the units, but rather the upfront costs, which has kept a thumb on the widespread acceptance. ADGE has eliminated this factor by maintaining ownership of the CHP system and covering all costs associated with design, installation and maintenance. The company sells only the energy used by the customer through long-term supply contracts that typically span 15 years, making it a true On-Site Utility, allowing the customer to almost completely disconnect from the national grid.
The takeaway here is that coal plays will be under the microscope for the time being at least until states make decisions on what they are going to require from energy companies in order to meet EPA mandates in coming years. Coal may be a dinosaur, but it is not extinct. There is still potential for implementation of emissions control systems and for exports to increase to less stringent countries, but it’s fair to say that domestic outlook is weakening going forward. Solar and other renewable energies hold a great deal of promise for the future, but their time has not come yet, nor is it in the foreseeable future. Natural gas is pegged by most to be the fuel of choice for years to come, but as regulations continue to tighten and budgets continue to get shaved, there may not be a better choice than CHP to maximize efficiency and profits for the countless companies where it’s a good fit.
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