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American DG Energy’s Strategy Of Providing
Electricity And Hot Water At A Lower Cost In Return For A 15 Year Commitment
Creates Long Term Cash Flow For The Company, Long Term Energy Savings And
Security For Their Large Facility Customers And Significant Environmental
Benefits For All
Utilities
Electrical Utilities
(ADGE-OTC: BB)
American DG Energy Inc.
45 First Avenue
Waltham, MA 02451
Phone: 781-522-6000
John N. Hatsopoulos
Chief Executive Officer
Barry J. Sanders
President and COO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published – March 21, 2008
BIO:
John N. Hatsopoulos
is Chief Executive Officer of American DG Energy. Mr. Hatsopoulos is Partner
and Managing Director of Alexandros Partners LLC, a financial advisory firm
providing consulting services to early stage entrepreneurial ventures. He is
also Chairman of the Board of Glenrose Instruments Inc. Mr. Hatsopoulos is a
co-founder of Thermo Electron Corporation which is now Thermo Fisher
Scientific (NYSE:TMO) and the retired President and Vice Chairman of the
Board of that company. He is a member of the Board of Directors of
Antigenics Inc. (NASDAQ: AGEN), American CareSource Holdings, Inc. (AMEX:
XSI), TEI Biosciences Inc., and a “Member of the
Corporation” for Northeastern University. Mr. Hatsopoulos graduated from
Athens College in Greece, and holds a Bachelor degree in history and
mathematics from Northeastern University as well as Honorary Doctorates in
business administration from Boston College and Northeastern University.
BIO:
Barry J. Sanders is President and Chief Operating
Officer of American DG Energy. He has served as Executive Vice President of
MicroLogic, Inc., where he directed the company’s B2B group. He has
previously been the Marketing Manager at Andover Controls Corp., and at
Tecogen Inc. where he directed the successful introduction of that company’s
DG chiller products in 1988. Mr. Sanders has also managed R&D projects for
the New York State Energy Research & Development Authority (NYSERDA) in
Albany, NY, where he created the highly successful University-Industry
Energy Research Program to accelerate commercialization of new
technologies. Mr. Sanders has a Bachelor of Science degree in chemical
engineering from the University of Rochester and an MBA in marketing from
Rensselaer Polytechnic Institute.
Company Profile:
American DG Energy (OTC Bulletin
Board: ADGE) supplies low-cost energy to its customers through distributed
power generating systems. The company is committed to providing
institutional, commercial, and small industrial facilities with clean,
reliable power, cooling, heat and hot water at lower costs than charged by
local utilities -- without any capital or start-up costs to the energy user.
American DG Energy is headquartered in Waltham, Massachusetts.
CEOCFO: Dr. Hatsopoulos, what was your
vision when you started American DG Energy?
Dr. Hatsopoulos: “In 1956, my brother
and I started a new company called Thermo Electron, which ended up being the
leader in many fields, one of which is energy conservation. I retired from
Thermo Electron's operations at the end of 1998 and George in 1999. We then
retired from the board in 2000, although George will remain Chairman
Emeritus. However, Thermo Electron had a system called Tecogen, and its
purpose was to save energy for buildings by selling them electricity and hot
water. When my brother and I retired, we never thought we would be running
another company again – at least I never did – but I bought Tecogen at that
time, with the purpose of being an investor. It soon became apparent that
while Tecogen could save hospitals and nursing homes an awful lot of money,
most of them either did not have the capital to buy the equipment or did not
have the expertise to manage the equipment. Therefore, we decided to start a
new company and become the ‘plug’, which was one of the words of one of our
potential customers who ran a hotel. She said, ‘You know Dr. Hatsopoulos, I
get electricity from the ‘plug’, so I do not need another headache. I have
enough responsibilities as manager of a hotel.’ We then decided to become
the ‘plug’ and start a company where we own the equipment and we sell hot
water and electricity like a regulated utility. We would put the equipment
in the building and the only commitment that the customer has is to purchase
electricity and hot water. Our agreements average about fifteen years. We
will be their first source of energy and in return, they would get the
energy at some kind of a discount. We sell on an average of about 50% of
their electricity and maybe 90% of their hot water.”
CEOCFO: Why
provide only 50% of an organizations need? Why wouldn’t they get it all from
you?
Dr. Hatsopoulos: “The whole idea is not
to design the system for their peak power, which becomes very capital
intensive, but to gear everything around hot water needs. To us, hot water
maximizes our return, so we gear everything around their hot water needs. On
average their electric needs are about 50%.”
Mr. Sanders:
“We deploy combined heat and power systems; the way they work is they
simultaneously make electricity, heat and hot water. Think of your
automobile that also uses an engine. In our case, we use clean natural gas,
but in your car the engine spins the wheels; on ours it spins a generator to
make electricity, but then the engine, just by its natural operation, gets
hot. For example we discussed earlier that in the winter when it is cold out
you turn your car heat on. Therefore, you are cogenerating in your car. You
are creating CHP or a combined heat and power system, because the heat is
actually coming off that engine and that is how you heat the cabin. In
almost the same fashion, we are able to simultaneously make electricity and
hot water. Well how does that affect the economics? What we want to do is
utilize all the energy that we produce – meaning electricity and hot water –
simultaneously. Now we want to apply this technology to a building. We want
to match the output of the technology to the building and basic
thermodynamics tells us that the heat is a limiting factor. So how much heat
or hot water a building requires is really how we determine the size of CHP
technology to deploy. The rule of thumb that we have learned after all these
years really suggests that a high percentage, 80 or 90%, of the requirements
of their heat or hot water is the correct amount. We then simultaneously
supply around 50% of the electricity. When I say heat and hot water I am
referring to space heat that we would use in the wintertime, domestic hot
water for sinks, showers and washing dishes. I am also referring to things
like laundry and swimming pools, because many of our clients have swimming
pools that need to be heated twelve months a year. Any kind of heat or
thermal load is what we are applying the CHP systems to.”
CEOCFO: Who
is responsible for maintenance of the system?
Dr. Hatsopoulos: “We are fully
responsible. The amazing thing about this is we install the equipment and we
are fully responsible for its operation. Since the customer is still
connected to the electric utility, if something goes wrong with the
equipment, we lose revenue, but the only thing the customer loses is the
discount. They continue to have electricity like they had before. Therefore
it is in our best interest to have the equipment running perfectly. We
manage the CHP systems remotely and monitor them to make sure that they are
operating at ultimate capacity.”
Mr. Sanders:
“We make revenue by just supplying energy to our clients. A customer needs
no budget. He does not need any capital investment. We select the equipment;
we do the engineering; we do the installation; we pay for all operating
costs; we pay for maintenance and any kind of fuel that is required to run
the machine. All our clients are paying is for the output, which in our case
is electricity, heat and hot water or cooling, and that energy is
discounted. This is why we call our business an On-Site Utility. Every day,
even as we speak right now, we are creating revenue by our systems running.
The lifeblood of our business is in keeping these assets operational.
Therefore, we have a variety of mechanisms in place to make sure that our
business runs, and runs well and that would include things like remote
monitoring. Every piece of equipment is remotely monitored. As a result, we
can control how our systems are performing. We have pagers and internet type
systems where we can keep in touch with how our fleet is operating on not
only a daily basis, but also as we are speaking right this moment.”
CEOCFO: Do
you need much space for the installation?
Mr. Sanders: “No they don’t require much
space at all. Our core product is a 75 kilowatt system. As an example, a 75
kilowatt system is what we would install in a 100-room apartment or a
100-bed nursing home or a hotel with 100 rooms. We prefer to be right next
to the existing onsite boiler that makes hot water so we are in the building
or we go outside or on the roof. The reason we love these systems is when we
get into bigger facilities - let’s say it’s a 500-room hotel - we like to
put multiple systems together because it provides a nice redundancy for us
and the client. They are mechanical equipment. As with any piece of
mechanical equipment they can have maintenance issues. If we put four or
five units in a given site we can do maintenance one at a time and still
keep the other four units running. For us, this modular concept applies
nicely.”
CEOCFO: How
do you reach your potential customer?
Mr. Sanders: “The core of the
conversation that John and I have described is electricity and hot water.
The key to our business is the hot water, so we look for clients or
buildings more specifically that require twelve months a year of some kind
of hot water load. Traditionally it has been in facilities where people
reside and that is why we like hotels, apartments, condos, co-ops, nursing
homes, assisted living, hospitals, some industrial operations and properties
with swimming pools. Large Olympic sized swimming pools use lots of hot
water so we are very active with YMCA, Jewish community centers, big
athletic clubs, universities, and high schools. We like to stay on the
smaller side of the marketplace – under a megawatt – but anything from
dairies, food processing, bakeries, and these kinds of facilities can work
too.”
Dr. Hatsopoulos:
“Barry didn’t mention that the market is also only in areas where electric
costs are high. You are not going to go to an area where the electricity is
2 or 3 or 5 cents a kilowatt, but you are going to go to areas like the
northeast where electric rates are substantially higher.”
Mr. Sanders:
“Traditionally in our business one would sell a mechanical piece of
equipment. The equipment would be sold to an engineer or facilities person.
We have changed the paradigm and instead of just trying to sell another
piece of mechanical equipment and putting all of the burden on the customer,
we have taken all of the burden, created more of an outsourced model. What
we are selling at the end of the day is cash flow. We are selling net income
and cash flow to our clients. Instead of going to an engineer we sell to the
CEO, the CFO, and COO. We are selling cash because we are giving them a
direct discount and the way we offer it to our clients has an effect on
their business. It has really changed the business and has been a key factor
to our growth.”
CEOCFO: Do
you find that many facilities are actively looking for energy alternatives
or do they need convincing?
Mr. Sanders: “Our friends in the Middle
East have done a lot of our marketing for us. With oil at around $100 a
barrel and with headlines announcing throughout the country – and especially
the northeast – that electric rate increases are coming, customers are
clearly looking for vehicles to reduce their energy. Their concerns are how
to reduce energy costs and where to apply their capital. We don’t need their
capital.”
CEOCFO:
Will you be expanding further out geographically?
Dr. Hatsopoulos: “Over the years,
Tecogen, which is the manufacturer of the equipment we use, has had
substantial sales in California. One of the biggest markets for their
equipment has been the West Coast. The reason we have not moved into
California is that we have as many customers as we can handle at this point.
Eventually we will be providing the same type of service on the West Coast.”
CEOCFO: You
became a public company back in November; why was that the time and how have
things changed for you?
Dr. Hatsopoulos: “We did something
different. As part of Thermo Electron, I was for years the CFO and
eventually the president of Thermo Electron, we spun out 24 public
companies. Thermo Electron was a venture innovator. We knew enough about
taking a company public, so we decided a little over a year ago that it was
to our advantage to take the company public, but without hiring a banker. We
are probably one of a handful of companies in the United States that went
public on their own. The reason we did it this way is because it would have
cost us, in fees alone, something like $2.5 million to raise a small amount
of money. Now, why did we want to go public? For two reasons. First, we
needed to raise some capital. Even though my brother and I have put in all
of the original capital and added some more since then, we also managed to
raise capital worldwide – half came from Europe and half the US. We managed
to raise $12 million. Therefore, our company is well capitalized. We have
over $5 million on our balance sheet right now. The second reason we wanted
to go public was our employees. As Thermo Electron grew, we discovered that
the most important thing we did for our employees was to give them shares in
their own company, so they could see everyday how well they were doing. We
managed to give restricted stock or options to almost every employee and
that was extremely important to them. Rather than giving them a few extra
thousand dollars, having a position in the right company was very important
to them. These are the reasons: employee incentives, and capital raising.”
CEOCFO:
What is ahead in the next few years?
Dr. Hatsopoulos: “Our goal is to
continue to grow. Sooner or later we will need more capital but we have two
options. The first is if the stock does well and we hope it does. The
company grew almost 90% last quarter and although we don’t expect to be
growing 90% each year, we do expect to continue to grow quite a bit. So,
either we will sell some stock if it is substantially higher or we will go
to the bank and pledge receivables. The second option is that because we
have fifteen–year contracts we have a solid cash flow. We have both these
options. The beauty of our business is that every new unit we install just
adds to the growth of the company.”
CEOCFO: Why
should potential investors be interested and what might they miss when they
first look for the company?
Dr. Hatsopoulos: “Let me start by giving
you the negative. We knew a lot of investors throughout the world, but when
we went to raise money a lot of the investors said ‘the company is too small
for us to invest in you.’ I was very disappointed and I thought we wouldn’t
be able to raise money. Meeting number one was in Scotland with one of our
investors. When Barry and I turned to leave he said, ‘Wait a second; come
back here. I cannot put you in our funds, but will you take my own money. I
will put in half a million dollars.’ We had that same scenario happen
throughout. Because of the liquidity and size of the company, the fund
managers can’t buy for their funds. The second negative is the stock is in
bulletin board and a lot of brokers are not allowed or hesitate to recommend
a bulletin board stock to their clients. There are quite a few brokers that
bought it for their personal accounts, but they can’t or are not allowed to
recommend it to their clients. Our goal is to go to a listed exchange. For
eleven years I was involved with the AMEX; for seven years I was a governor
and for four years I was on the nominating committee of the American Stock
Exchange, so I know the fellows quite well. I went down there and
unofficially asked them what it would take to be listed on the AMEX. This
would eliminate a lot of the obstacles for people to buy the stock. They
said that although it sounds like a good listing for the exchange, the stock
price needs to be over $2.00. I am waiting to see when the stock will reach
that level.”
CEOCFO:
What should readers remember most about the interview?
Dr. Hatsopoulos: “We have a business
that is almost guaranteed to continue to grow and very few companies can
tell you that. The second thing is we are one of the cleanest energy sources
in the country. Last year, we received recognition from the EPA for saving
the equivalent of thirteen hundred plus emissions of cars or two thousand
acres of forest. We are one of the cleanest energy sources that exist. Not
only do we save money and energy, but also we are clean. Now I am going to
say something to you that you will think I am insane; we are cleaner than
solar, which doesn’t make sense because solar does not have any emissions.
The reason we are cleaner than solar is because solar only operates during
the day; at night they use traditional sources of energy such as the
electric utility and boilers, which pollute. We run seven days a week,
twenty-four hours a day and therefore we continue to save emissions
throughout the days, weeks and years. We have all three, save money, clean
energy, and growth.”
Mr. Sanders:
“The key is that our value proposition to our clients is that we save
them money. In addition, we have a nice model, with long-term deals and it
is a pure growth model. We are going into 2008 now with a base revenue that
we can count on without even adding any new clients to it. Therefore, on our
side it is a growth model and on our clients side it is value proposition
and pure cash flow.”
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