Catching up on MMC Energy (MMCN)
MMC Energy (MMCN.OB) had an investors' update conference call late last month, and recently announced a significant bit of stock-related news, so I thought I'd catch up a bit on this company.
MMCN is a small scale power plant acquisition company, with the goal of acquiring small electrical power generating facilities in high demand areas. They came public last summer, just in time to put a couple of their plants online for the Southern California heat wave, and are at this point unprofitable and -- they hope -- at a very early stage of their growth.
I wrote a bit about MMCN when I first purchased shares, and the shares I own are still under water. Largely, that's because most investors, myself included, have a hard time putting a value on this company until we know how many acquisitions -- and which acquisitions -- they'll be able to make. They also had some insider selling, and a delay of their stated goal of listing on the AMEX by the end of 2006, both of which I think depressed the share price.
The interesting thing about MMC, in my opinion, is not so much that they're acquiring power plants -- which most people agree are in very short supply, with many high growth areas routinely undersupplied -- but it's the way they make money from these plants.
They own only three operating plants right now, but they've shown with these three and indicated for future acquisitions that they are not really aiming to be in the business of selling electricity.
Odd, eh? Instead, they essentially use their power plants to sell insurance. Now don't get me wrong, they do sell the electricity when their plants are operating, and they do make some money from those sales, but the vast majority of their revenue is from "reliability sales."
The company employes what they call a "Reliability Asset Model," whereby they recognize that the primary value of their small power plants is the capacity they provide -- not necessarily the actual watts spit out at any given moment.
You see, utilities as part of their regulatory burden are required to show that the have the capacity to handle peak power demand, and that they have a margin of safety of additional demand above and beyond that capacity.
And MEMC sells them the promise of that capacity. So far for 2007, for example, they have agreed to what are called in California "resource adequacy contracts" for all of their generating capacity for the year.
That means, before they even fire up the turbines they've made $3 million for this year. And this money is theirs to keep even if the plant never operates, so you can imagine the very high margins these sales represent. In exchange, they agree to have their plants ready and willing to fire up at ten minutes notice to supply the grid during peak demand times.
So most of the time, their power plants aren't operating. When they are called upon, they still get paid an additional amount at some kind of market rate for generating whatever electricity is required.
I just love this model.
Now, the bad news is that although they've executed these forward reliability contracts for several years out for much of their capacity, they still can't make it as a going concern without significantly more acquisitions -- their SG&A expenses and the recommissioning expenses for each plant take too much of a bite out of the firm when they've only got three tiny plants in their portfolio, so growth is necessary.
And while they have enough cash to get through the year, they don't have enough to make acquisitions -- so there will be some significant amount of financing, probably dilutive equity financing, that has to be done as soon as they're ready to make more acquisitions.
Which is why the bit of news they announced this week stands out as significant: shareholders (myself included) voted to approve a reverse split in the shares, and the board has determined that it will be a 10:1 reverse split to get the share price up to the neighborhood of eight or nine dollars.
Now obviously splits and reverse splits don't usually mean anything -- but this one is significant, because it will supply the last key criteria to meeting the listing requirements for the major exchanges. Now, as soon as the board feels like it, they can apply for a listing on the AMEX (or possibly the Nasdaq, I suppose).
And that major exchange listing will be a key financial development, since it will make their shares available to institutional investors and provide a much broader market for them when they do make any secondary offerings required in order to finance their acquisitions. The company believes that there is significant demand for institutional investment in the energy generation space, and hopefully a major exchange listing will help them to bring in those investors in secondary offerings without causing too much damage to the share price.
Though I bought shares at an inopportune price, in retrospect, I do think this model makes a lot of sense going forward and I'm confident that management is at least trying to build the company in the right way. If you look at their financials for 2006, the $6 million loss on the year included more than $4 million attributable to one-time items -- administrative costs related to their IPO and financing, and recommissioning of their newly acquired plants. If those costs hadn't been there, they would have been profitable for the third quarter last year thanks to the heat wave ... so there is some promise that this model works if they can scale up a bit more. I'm not buying any more shares just yet, but I am watching this one with some interest.
Update: About an hour after I finished this post -- the shares dropped 20%. At the moment I have no idea why, but it looks like someone might not like the reverse split very much.
MMCN is a small scale power plant acquisition company, with the goal of acquiring small electrical power generating facilities in high demand areas. They came public last summer, just in time to put a couple of their plants online for the Southern California heat wave, and are at this point unprofitable and -- they hope -- at a very early stage of their growth.
I wrote a bit about MMCN when I first purchased shares, and the shares I own are still under water. Largely, that's because most investors, myself included, have a hard time putting a value on this company until we know how many acquisitions -- and which acquisitions -- they'll be able to make. They also had some insider selling, and a delay of their stated goal of listing on the AMEX by the end of 2006, both of which I think depressed the share price.
The interesting thing about MMC, in my opinion, is not so much that they're acquiring power plants -- which most people agree are in very short supply, with many high growth areas routinely undersupplied -- but it's the way they make money from these plants.
They own only three operating plants right now, but they've shown with these three and indicated for future acquisitions that they are not really aiming to be in the business of selling electricity.
Odd, eh? Instead, they essentially use their power plants to sell insurance. Now don't get me wrong, they do sell the electricity when their plants are operating, and they do make some money from those sales, but the vast majority of their revenue is from "reliability sales."
The company employes what they call a "Reliability Asset Model," whereby they recognize that the primary value of their small power plants is the capacity they provide -- not necessarily the actual watts spit out at any given moment.
You see, utilities as part of their regulatory burden are required to show that the have the capacity to handle peak power demand, and that they have a margin of safety of additional demand above and beyond that capacity.
And MEMC sells them the promise of that capacity. So far for 2007, for example, they have agreed to what are called in California "resource adequacy contracts" for all of their generating capacity for the year.
That means, before they even fire up the turbines they've made $3 million for this year. And this money is theirs to keep even if the plant never operates, so you can imagine the very high margins these sales represent. In exchange, they agree to have their plants ready and willing to fire up at ten minutes notice to supply the grid during peak demand times.
So most of the time, their power plants aren't operating. When they are called upon, they still get paid an additional amount at some kind of market rate for generating whatever electricity is required.
I just love this model.
Now, the bad news is that although they've executed these forward reliability contracts for several years out for much of their capacity, they still can't make it as a going concern without significantly more acquisitions -- their SG&A expenses and the recommissioning expenses for each plant take too much of a bite out of the firm when they've only got three tiny plants in their portfolio, so growth is necessary.
And while they have enough cash to get through the year, they don't have enough to make acquisitions -- so there will be some significant amount of financing, probably dilutive equity financing, that has to be done as soon as they're ready to make more acquisitions.
Which is why the bit of news they announced this week stands out as significant: shareholders (myself included) voted to approve a reverse split in the shares, and the board has determined that it will be a 10:1 reverse split to get the share price up to the neighborhood of eight or nine dollars.
Now obviously splits and reverse splits don't usually mean anything -- but this one is significant, because it will supply the last key criteria to meeting the listing requirements for the major exchanges. Now, as soon as the board feels like it, they can apply for a listing on the AMEX (or possibly the Nasdaq, I suppose).
And that major exchange listing will be a key financial development, since it will make their shares available to institutional investors and provide a much broader market for them when they do make any secondary offerings required in order to finance their acquisitions. The company believes that there is significant demand for institutional investment in the energy generation space, and hopefully a major exchange listing will help them to bring in those investors in secondary offerings without causing too much damage to the share price.
Though I bought shares at an inopportune price, in retrospect, I do think this model makes a lot of sense going forward and I'm confident that management is at least trying to build the company in the right way. If you look at their financials for 2006, the $6 million loss on the year included more than $4 million attributable to one-time items -- administrative costs related to their IPO and financing, and recommissioning of their newly acquired plants. If those costs hadn't been there, they would have been profitable for the third quarter last year thanks to the heat wave ... so there is some promise that this model works if they can scale up a bit more. I'm not buying any more shares just yet, but I am watching this one with some interest.
Update: About an hour after I finished this post -- the shares dropped 20%. At the moment I have no idea why, but it looks like someone might not like the reverse split very much.
Labels: mmcn
This article posted by One Guy @ 4/10/2007 12:03:00 PM 3 comments
Add to: del.icio.us *Furl *Google *Spurl *reddit *StumbleUpon *Yahoo MyWeb *
Add to: del.icio.us *Furl *Google *Spurl *reddit *StumbleUpon *Yahoo MyWeb *
