PowerSecure International, Inc., Lime Energy Co. - M&A Call

Mar. 1.13 | About: lime energy (LIME)

lime energy co. (NASDAQ:LIME)

March 01, 2013 8:30 am ET

Executives

John D. Bluth - Senior Vice President of Investor Relations and Corporate Communications

Sidney Hinton - Chief Executive Officer, President, Director, Chief Executive Officer of PowerSecure Inc, President of PowerSecure Inc and Director of PowerSecure Inc

Christopher T. Hutter - Chief Financial Officer, Executive Vice President, Secretary and Treasurer

Analysts

Robert D. Brown - Lake Street Capital Markets, LLC, Research Division

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Francesco Citro

Operator

Good day, ladies and gentlemen, and welcome to the PowerSecure International Conference Call. My name is Shayla, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to now turn the call over to your host for today, Mr. John Bluth, Senior Vice President of Investor Relations and Corporate Communications for PowerSecure International. Please proceed, sir.

John D. Bluth

Thank you very much, Shayla, and thank you all for joining us today for our conference call to discuss PowerSecure's acquisition of Lime Energy's ESCO business. Joining me on the call from the PowerSecure management team are Sidney Hinton, our Chief Executive Officer; and Chris Hutter, our Chief Financial Officer.

Before we begin, I want to remind you that during the course of the discussion today, we expect to make forward-looking statements under the Safe Harbor provisions of the federal securities laws. These are all statements other than historical facts, including statements concerning the future business, financial results, and outlook of the company, as well as statements about the acquisition to be discussed on this call. Forward-looking statements are based on the current expectations and beliefs of management but are not guarantees of future performance or events, and they're subject to risks, uncertainties and other factors, including those discussed in the company's SEC filings as well as on the call today and in the press release, which could cause actual results to differ materially from those projected or implied. The company assumes no duty to update any forward-looking statements.

Additionally, as we announced last week, we will be releasing our financial results for the 2012 fourth quarter and full year next Thursday, March 7, after the market closes. As you can appreciate, we will not be able to address any questions related to our fourth quarter or full year 2012 financial results on today's conference call but wanted to communicate live with everybody today to provide you with additional context surrounding our acquisition of Lime's ESCO business, which we're very excited about.

Now I'd like to turn the call over to Sidney for some remarks. And then we'll open up the call to Q&A.

Sidney Hinton

Thank you, John, and thanks to all of you for joining us today. As you saw, when we made our solar acquisition over this past summer, we have a track record of moving quickly to enhance our offerings if we find high-value, high-return acquisition opportunities. And we believe we found just that with this great acquisition of Lime Energy's ESCO business. We've paid just $1.9 million in cash and assumed $3.7 million of net liabilities related to the ongoing projects.

In return for that investment, we're adding $27 million in revenue for projects which have been awarded to Lime plus a substantial pipeline of projects. And just for the help, I know we have almost all our analysts on the call, that pipeline is around $75 million when you're trying to size it up of existing customers and proposals that are out there but not awarded. You will see that the awards reflected in our -- you will see these awards are not -- they won't be in our backlog immediately. But the $27 million will be reflected in our backlog once the customer transition, permitting and bonding matters are finalized, and then we'll put them in the backlog. And we do expect this revenue to be recognized in 2013 as the projects are completed.

We expect the transaction to be accretive to EBITDA in 2013, and we expect that it'll be accretive to EPS, although we can't say for certain until we finalize our accounting of the transaction, so we know how much is goodwill and then how much is amortized into earnings. We'll have more to say on the financial impact of the transaction when we discuss our 2012 fourth quarter results on next week's earnings call.

The catalyst for the acquisition was Lime's inability to secure bonding on the awarded projects due to the financial restatement issues that they -- which they have disclosed publicly. This is a strong, fully functioning business with 20 years of operational excellence. Lime had simply been unable to operate it because they could not perform -- they could not obtain performance bonds without audited financial statements. Because of the PowerSecure's financial strength, our strong balance sheet, our bonding relationships and our great track record on large infrastructure projects, we've already obtained surety bonding commitments for all of these awards. Our financial strength enabled us to move very quickly to secure this opportunity. It was our ability to move swiftly and decisively that enabled us to capture this extraordinary value for the company and for you, PowerSecure shareholders.

To give you some context, back in 2008, Lime paid $15 million for this business unit. But beyond the compelling financial drivers -- and they are compelling. I really want to be clear. We know we've got a great deal. It was definitely the thing that got our attention and motivated us to pull this to the table. But over the past weeks while we've done our accelerated due diligence and taken ownership of it, we really become very enamored with the business that they've built from a strategic standpoint. And I'm going to dive into that a little bit. But I would tell you if we had paid more than what they paid in 2008, if we had paid over $20 million, I'd still be on this phone call being a huge advocate for it. I want to be clear, we've got a great deal, we know that, on the financials. But it's a very, very complementary business to us. And truthfully, that's why we're doing this call this morning is to help everyone see the synergies beyond just the financials.

Now let me dive in a little bit on that. The acquisition brings us new customers. Their business has targeted the super ESCOs. And for those of you that are familiar with the industry, there's 16 big ESCOs. I won't name them because we don't have permission to do that, but you probably can guess who they are. And Lime has built a business on serving those. Bringing those relationships to the table for us, which we have not served. We have, over the 12 years, we've tried to partner with them. We've talked with them about peak shaving. It always gets their interest. But we've not been able to get traction and actually do deals. But this does bring that to us, and we're very excited about it.

And working with those customers, it brings us the ability to do lighting projects. It brings us the ability to do our peak shaving, which is a huge deal, peak shaving with these customers. The footprint that Lime brings to the table is in the Northeast. It's not a footprint where we've been strong. It is a footprint that they're very strong with this. It's a footprint that matches up very well with peak shaving, particularly around the PJM territory. So we're very excited about that, what the potential it brings for our DG business unit. And then for the lighting, just on their traditional energy conservation measures. Our ambition is that by adding our existing solutions to their traditional ESCO business, we'll actually be able to improve their gross margins and broaden and thicken the value that they're offering to those super ESCOs by increasing the stream of savings that's out there.

Just to echo one more thing about their customer base and their footprint. As you know, we've announced a new chain up in the Northeast. The Hurricane Sandy or Superstorm Sandy has certainly raised awareness and of the need for improved backup solutions, which bodes very well for us. And this acquisition just fits perfectly because it gives us an immediate front into that market versus having to build one over time. As part of the due diligence, I was blessed to meet with their largest customer, which was about 50% of the contracts that we took over. And during those meetings, it was a very reassuring to see the level of trust and respect that Lime had earned over the 20-plus years of doing business with them.

This, from a PowerSecure standpoint, as investors, when you look at our -- this is going to be part of our energy efficiency division. We're very excited because it greatly broadens the offerings that we have there. To date, we've had just LED solutions. We've said a number of times that we look for things in the -- to add to our energy efficiency portfolio. We just hadn't found things that could be accretive. This can be, and it's a great addition. It adds to us, it brings lighting solutions, HVAC upgrades, building envelope upgrades, transformer efficiency upgrades and water conservation upgrades. So it really thickens our energy efficiency in a wonderful, wonderful way.

Over the past 20 years, this business has established itself as a national leader in designing and implementing thousands of energy efficiency programs for utilities, governmental agencies and private enterprises. They deliver solutions to the major ESCOs, which enable the ESCOs to help their clients meet their energy savings and carbon reduction goals across a wide portfolio of facilities, driving increased profitability and competitiveness for those customers. And these solutions will help their customers meet increasing clean energy regulations.

After meeting and getting to know several members of the team through the acquisition process, it's very clear to me why Lime has had success in establishing itself as a market leader in serving these ESCOs. We acquired a team with tremendous customer relationships, proven execution and energy efficiency engineering expertise, which we plan to leverage across PowerSecure. We're truly thrilled to welcome this exceptional team to the PowerSecure family. I'm very, very excited for the value that we've added here, the significant value we've added and the significant value we'll be able to deliver our customers and the new customers and for the opportunity to serve them with these broadened solutions. It's an incredible financial transaction, but it's also an incredible strategic transaction for us. We're excited about it. And with that, we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rob Brown from Lake Street Capital Markets.

Robert D. Brown - Lake Street Capital Markets, LLC, Research Division

I wanted to just get a little sense in -- what's the level of utility overlap with your current customer base? And does this add kind of utilities to what you've been doing? Just give a sense of kind of how the utility overlap works with this.

Sidney Hinton

There's incredibly minimal overlap. There is slight overlap, although it's not within the same business units, of one of our most recent additions as a utility partner. So it will just broaden up what we're serving that utility with. But the rest of the territories they're serving in, there's not a lot of overlap at all. Now there's some, but it's probably -- I'm guessing, but I would say 75% new, maybe 25% overlap. And it might be as much as 90-10 with only 10% overlap.

Robert D. Brown - Lake Street Capital Markets, LLC, Research Division

Okay. Good. And then I assume that's one of the leverage points you can get. But maybe give me a little more color on how kind of these leverage points work with this existing business. Are you sort of bringing their products into your existing sales stream and vice versa? Or is that the genesis of basically how it works?

Sidney Hinton

You know that their products and solutions, I mean, we'll continue targeting the super ESCOs with those. We'll certainly use them with our customers. But our customers are primarily commercial- and industrial-based outside of our utilities. And they will look to partner with our utilities on it. But I think it's more of a situation where we will try to expand the products and solutions that they're offering to the super ESCOs because we just have some really high value-add solutions that they didn't have before that we can put through that and broaden up, thicken up the offering for the super ESCOs to their big customers.

Operator

[Operator Instructions] And we have no further questions in queue at this time.

Sidney Hinton

Well, thank you very much. We appreciate your time...

Operator

We do have a question from Eric Stine with Craig-Hallum.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Looks to be a very nice acquisition. I'm just wondering, can you talk about the gross margin, maybe profile of the business? Should we think of this more along the lines of your LED business?

Sidney Hinton

It's more along the lines currently of our solar business. And our ambition is to pull those gross margins up, leveraging our LED solutions and our DG solutions.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Okay. All right. And then I'm just curious about the backlog. You talked that about 50% concentrated to 1 customer. I mean, is that historically how their business has been? Or just talk about maybe the customer diversification historically of their backlog, and then maybe how it looks in terms of the pipeline as well.

Sidney Hinton

They have a very diverse customer base. It's similar to ours just in terms of when you win certain large projects, it creates a heavier weighting with customers that at a moment in time can look like a concentration issue. But then over time, we don't anticipate that. Well, I don't know. We'd love to have that issue. We'd love to convert $30 million or $40 million or $50 million of that $75 million with any of them. But they have a broad customer base. And that we believe we'll be able to add to it with some of our relations with the other super ESCOs that we've talked to and just haven't been able to figure out how to add value directly to them versus these people have the proven capability of adding value to them and tucking in our traditional solutions.

Christopher T. Hutter

Hey, Eric, I'd just add quickly to that. This is a team that's got a 20-year track record of growing and developing customer relations. They've really established broadly across this type of business, amazing relationships. So it's a cornerstone piece of what we're buying here.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Right. Okay. And so just to be clear, I mean, what you've got in backlog right now, that simply -- that's just the timing as it stands right now. But the pipeline itself, and even beyond the pipeline, just the overall opportunity that you wouldn't consider that concentrated at all.

Sidney Hinton

I would look at the opportunity as incredibly significant. That, I mean, there's literally billions of dollars that gets done in this work on an annual basis. And their financial situation at the company they were at before was already less before their issues. This is a place we'd love to grow, it's a place we've targeted. We just simply hadn't been successful in cracking that super ESCO nut. And I give them a ton of credit. There may not be a lot of obvious barriers to entry in serving those companies, but there's the very real barrier, which is earning their trust and respect and learning how to communicate in a way that they can process it quickly and grab hold of. And these guys have done a great job at it, and we can't wait to bring our peak shaving and LED solutions to it, as well as our Utility Infrastructure. They're doing transformer efficiency upgrades. It's very exciting.

Christopher T. Hutter

Hey, the other -- I'd just add to that. If you think about what we're sharing today, $27 million of awarded projects that were taken over, the thing I'd add there is this business that we're buying has been constrained over the last really 9 months to a year with respect to Lime's public financial issues and the inability to get bonding and so forth. So we really do this as -- and I know the Lime ESCO team as well views this as a way to really unlock all that potential because with our balance sheet, our capacity, we can just let that team run and go out and get all -- work hard against that pipeline in an unbridled way, so...

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Okay. Got it. Maybe just one last question, then I'll let someone else go. So the pipeline, I mean, can you just -- a little more clarity into how -- kind of how you define that pipeline? Is that something where you've got, I mean -- Lime, well, now you are actively going after, you've made a proposal on that business and you're waiting to hear. Is that how we should think about it?

Sidney Hinton

I should say it goes everywhere from -- it's from that stage, they've made proposals, they're waiting to hear. It goes all the way up to the stage of they've made proposals to the person who has a letter of intent. And assuming the letter of intent is executed, we would then win the work. That's the furthest point in the stage, and it goes all the way back to, hey, they're in initial conversations about this opportunity and this is the scope and size of it. It really is all of -- each of the stages along the pipeline. Some are relatively mature and some of them are relatively in the development. And we just literally -- and believe me, we never talk pipeline. I don't think we've ever given a number on our pipeline at the company. But we just wanted to somehow convey that it's not just a point in time that we're acquiring in the $27 million of ongoing business, that it was a -- it is an ongoing business. No question, it's been impacted by their inability to bond these projects and this, what I would consider this as damming effect of light and water. In other words, a beaver dam holding water back, that's what their contracts have been. They haven't been able to get bonds, so they just stopped. And that certainly impacted their ability to develop the pipeline. And I would expect we will see some burps along the way around that. But at the price we've acquired it at and with the talent they have and our financial strength, I think we'll be able to overcome that relatively quickly. And preferably we're sitting here a year from now, it will be a whole lot bigger pipeline and a bigger backlog.

Christopher T. Hutter

Hey, Eric, while we're on backlog of pipeline I want to make a -- just sort of set the table as we look into next week and our earnings on Thursday, what you're going to see in the backlog we publish with our earnings is our traditional backlog, so everybody can see apples-to-apples. We're going to be diligent and deliberate with how we then put this $27 million of awards into our backlog. We'll do that again as we are really clear in our assessment of each contract and each project going forward. I do expect that much of that $27 million will drop in fairly quickly. But I also want to sort of set the expectation when you see our backlog next week, it will not include the Lime. We'll, of course, talk about that on the call. We can give you some updates along that front. But I just want to make sure everybody understands why we're doing what we're doing and appreciates that we view that backlog as something we want to make sure we're really buttoned up about before we put those projects in there.

Operator

Your next question comes from the line of William Bremer with the Maxim Group.

Francesco Citro

This is actually Francesco Citro filling in for Bill. If you can help us understand a little better the terms of the acquisition, a clarification, because Lime Energy also issued a press release, and why the $1.9 million in cash is common in both releases. They actually released that you are assuming $9.9 million in net liabilities, while you have $3.7 million. Can you help us understand where the difference comes from?

Sidney Hinton

I sure can. And I'll let Chris answer it. But our acquisition when we -- the whole time we've negotiated, it's been very clear is $4 million of cash and $1.5 million of negative working capital for $5.5 million. And right at the very end, we picked up just a few more thousand dollars of some accrued vacation and stuff like that so that's why it comes out to $5.5 million, $5.6 million. And then they received some checks earlier this week, which dropped the cash. Again, we limited it to a negative $1.5 million of working capital. They received some checks so that dropped the cash that we had to pay them. They took it up to like $3.6 million, $3.7 million of negative working capital, so we only had to give them $1.9 million to date. They chose to report it. We also took the receivables. I guess from an optic standpoint, they chose to report it in a way that shows the payables that came but not talk about the receivables that came as the offset, but...

Christopher T. Hutter

Let me try -- I will try and I'm going to point everybody to our 8-K. In the third paragraph of the 8-K, I think we tried to lay it out there very clearly that yesterday, we gave Lime $1.9 million of cash. And then what did we get in return? We got the business, of course. We got receivables of $6.3 million for the business and payables of $9.9 million, which the difference between the receivables of $6.3 million and the payables of $9.9 million, of course, is the math there is that's your negative $3.7 million of working capital that we took over. So the $1.9 million that we paid them in cash plus the $3.7 million of negative working capital we took over related to the projects is what boxes to the $5.5 million total consideration net that we gave to Lime on the acquisition. What Lime took was a more traditional way to think about it, which is they said, "Okay, we've got the $1.9 million of cash, PowerSecure assumed $9.9 million of payables related to the projects." But the other piece of it that you have to put into the math, of course, is that we also got $6.3 million of receivables. So that's how that all works. And again, if you look at the third paragraph of our K, I think it spells it out very clearly.

Francesco Citro

Right. No. We had no time to react, given the news. But yes, that tells a lot actually. It's kind of looking at the glass half empty, half full, I guess, on Lime's side. But that was really clear.

Operator

We have no further questions in queue at this time.

Sidney Hinton

Well, again, thank you all for joining us this morning. We appreciate your support and we appreciate your interest. And we will look forward to speaking with you all next Thursday on our earnings call. Have a good day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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