Discovering Potential In EV Infrastructure: Why Uncle Sam's Handouts Don't Always Work

| About: Car Charging (CCGI)

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

On the brink of bankruptcy, with several impeding class action lawsuits, Ecotality (ECTY) has left investors bleeding from the jugular as the share price took an 80% punch on August 12, 2013 eventually dropping the stock to the 52-week low of $0.12/share. Disclosed in the Form 8-K, the company puts in plain words that the Department of Energy ("DOE") has suspended payments to the company in connection with the EV Project, in response to Ecotality notifying the DOE that they may not be able to fulfill their operational obligations in the event where they cannot secure additional financing. With the company betting their bottom dollar on receiving the DOE government grants, the present absence of that funding has sent them and investors alike in a tail-spin for bankruptcy and disaster.

How Investors Had the Wool-Pulled-Over Their Eye's

Prior to the announcement, Ecotality was notoriously known as one of the largest "Electric Vehicle Infrastructure Developers and Manufacturers" in the industry. I want to highlight the quotations over that title as it is only a half-truth. Digging through the 10-K, we can establish that Ecotality has three principal business lines from which the derive revenue:

  1. The Blink line of EVSE, or "charging stations," for passenger vehicle applications, represented by the Blink Level 2 residential and commercial chargers and Blink DC Fast Chargers
  2. The Minit-Charger line of advanced fast-charge systems for industrial applications including material handling and airport ground support equipment
  3. Testing and consulting services to utilities and government agencies worldwide, including the Advanced Vehicle Testing Activities and Advanced Vehicle Testing and Evaluation programs for the DOE, and the EV Micro-Climate Program.

We can confirm with unquestionable doubt that Ecotality has in fact manufactured and distributed 12,500 Blink line charging stations in both residential and commercial properties across 18 states however, the puzzlement arises when we analyze the how the company claims to obtain their primary source of revenue from this operation alone. Stated on the 12th page of the 10-K, the company reiterates that the primary flow of revenue was to come from the sale of charging platform hardware, in addition to periodically collecting charging fees from the commercial installations. This however was not the case; the numbers show that in the first quarter of 2013, EVSE product sales only accounted for about 1% of the company's $15.9 million revenue, with <1% of revenue coming from charging fees. Those figures seem anecdotal, because 98% of the revenue came from somewhere else, contradicting the company's statements of primarily deriving the revenue from operations stated in section (I) above.

So where did the vital portion of revenue come from? In 2009, Ecotality received approval for a grant in the amount of $99.8 million, with an additional $15 million coming in 2010 from the DOE to manage and participate in the EV Project . Over the course of 2011, the company's apparent sales spiked 108% to $28 million followed by a 93% jump to $55 million in 2012. It is inevitably important to note that of the $55 million recorded in 2012, $40 million came directly from the EV Project alone. This begs the question; upon taking a closer look we can determine Ecotality's primary source of revenue stemmed from working for the federal government as a project manager for the EV Project. On hardware sales alone, 10% percent of total 12% came from Industrial materials handling sales and solar/battery pack sales (ii) making the EVSE sales the lowest grossing figure in sequence from the primary lines of business (above 1.(III) 2.(ii) 3.). In essence, Ecotality never really had meaningful revenues from the business model they claimed to follow, rather government subsidies that facilitated revenues that diverged from what investors thought they were buying into.

Surveying the Industry for Alternatives

Investors seeking exposure to the niche market of EV infrastructure development, have but only a few publicly traded companies to decide to invest in, especially with the recent collapse of Ecotality. Investors weak-in-the-knees from Ecotality's debacle learned the hard way that a government's fiscal intervening can hinge a company's survival if that money is relied on. This is where I want to introduce NRG Energy (NYSE:NRG), a company that owns and operates power plants, currently producing enough electricity to power 20-million homes, with retail operations in 16 states (as well as some assets internationally in Australia and Germany). NRG is concurrently innovating EV Infrastructure with their wholly-owned subsidiary eVgo. Stationed in the United States, eVgo is a privately funded electric vehicle infrastructure developer and manufacturer of both residential and commercial Level 2 & 3 charging stations. I want to emphasize that being privately funded means that the company will have no reliance whatsoever on the government, warranting that the company will neither stumble nor prosper from government intervention. Success for eVgo will be based on NRG Energy's own privately-funded investments and initiative.

eVgo has put priority in delivering residential charging stations but also hosts a number of commercial charging stations as well. eVgo utilizes a cloud system network that works as a subscription model, with plans that combine both home (starting at $29.95/month) and public charging station use, utilizing the benefits of having a "fuel-up" station at or away from the users home (pay-as-you-go options are also available). A subscription to a monthly electric charging plan will result in no up-front cost to the customer for the home charging dock nor for the installation, which safeguards the company from losing recurring revenue from charging fees, a contributing factor to the demise of Ecotality.

The commercial eVgo charging network is comprised of four types of stations: Freedom Stations, REV Workplace/Multi-family, and Convenience Stations. Freedom Stations include Level 3 DC fast chargers that can add 30 miles of range in as little as 10 minutes. Convenience Stations are typically smaller sites hosted by a retailer, such as Walgreen (WAG) and Best Buy (NYSE:BBY) chains and other retailers, where electric vehicle owners can charge their cars while shopping. Much like the home eVgo charging docks, the Convenience Stations will cost the retailer nothing other than the space in their parking lot to host an eVgo station. This is a great incentive for retailers to participate in the building of the eVgo network.

Looking to expand, eVgo has entered into an agreement (pg.24) with the CPUC to build at least 200 public fast charging Freedom Station sites and wiring and associated work to prepare 10,000 commercial and multi-family parking spaces for electric vehicle charging in California, the epicenter of EV development. With a fortified business model, eVgo stands in the vanguard of EV infrastructure development as a self-reliant, privately funded energy giant looking to bring the EV marketplace to fruition. As an investor however, getting a piece of the eVgo subsidiary from NRG, a corporation with an $8.5 billion dollar market cap., may turn out to be a lower yielding return if the EV Infrastructure market matures, as the stock price will fluctuate with company's core line of business; energy production rather than EV infrastructure development.

The EV Infrastructure Development Pure-Play

Investors ravenous for pure-play exposure to the EV infrastructure industry may want to dial in their attention to Car Charging Group (OTCPK:CCGI), an up-and-coming EV infrastructure innovator with a distinguished business model. Dissimilar to Ecotality, Car Charging is a privately funded (exempting an immaterial $10,594 grant (pg. F-2)) distributor & owner-operator of over 1,100 charging stations positioned across the United States. Without reiterating the benefits of being privately funded, the benefit of being an owner-operator means that Car Charging is not involved in the business of developing nor manufacturing their own charging stations, rather strategically placing them in commercial locations and high-turnover parking spaces. Unlike competitors, CCGI outsources the manufacturing of these charging stations by purchasing them from manufacturers with a fleet comprised of a majority of ChargePoint (Coulomb Technologies) systems as well as Ecotality's Blink Chargers. This ensures CCGI the flexibility to harness advancements in the technology (such as faster DC chargers or even wireless integrated models) without any constraints to suppliers in the future.

The company currently has more than 85 strategic partnerships (pg. 2) across various business sectors with their partners managing or owning more than 8 million parking spaces which include but are not limited to: Walgreens, Ace Parking, Central Parking, Equity One, Equity Residential, Pennsylvania Department of Environmental Protection, and the City of Miami Beach. Securing long-term exclusive contracts with these property owners means that once a station is installed, that location becomes exclusive to CCGI for almost 21 years. The benefits of doing so means that CCGI can mark its territory early so the company can derive greater revenue when the market gains further traction in the near future.

Revenue Model

Like NRG, Car Charging utilizes the revenue model where they periodically accrue charging fee revenue while maintaining ownership to the charging station, resulting in no up-front costs for the hardware or installation for the property owner. The key hybrid difference here is that Car Charging offers various property owners revenue-sharing plans which explain their mass accumulation of partnerships and agreements to date. The thinking here is simple, as the demand grows for EV's, more charging stations will be deployed across the strategic locations in-line with that demand. In a recent study featured on NBC News, IMS Reasearch predicts that the number of charging stations will grow from a mere 135,000 worldwide in 2011 to 10.7 million in 2020, with the fastest growth likely to occur in the U.S., China, Japan and Germany.

(Click to enlarge)

Above is an annual revenue projection sensitivity table for CCGI with made assumptions. The market share is calculated using the projected 10.7 million chargers in the worldwide market by 2020. Being the operator of a current flock of 1,100 charging stations, the market share of CCGI is presently at 0.8% (1,100/135,000). A charge rate of $2.50/hr was used, which is what The Car Charging Group quotes on their website. The average hours each station is used/day was determined using a conservative range of 0.5-3 hours as some locations will undoubtedly be busier than others and vice versa. Hence, assuming CCGI has a global market share of 0.8% in 2020 (or 85600 charging stations) that are used, on average, two hours a day; its annual revenue would be approximately $156 million. It should be noted that this figure does not take into account the revenue sharing CCGI offers property owners, making the number fractionally smaller depending on the percentage split.

Acquiring to Grow: Is Ecotality The Next Candidate?

The Car Charging Group has been actively acquiring competitors so far in 2013, having completed three strategic deals to expand its reach in the market. CCGI obtained additional charging stations and contracts with potential suitable properties through its acquisitions of Beam Charging, EVPass and, most recently, 350Green.

The first two purchases were strategically planned on the East Coast, specifically Central NY and NYC. When Mayor Bloomberg promised to "make New York City a national leader in electric vehicles" by announcing the creation of 10,000 parking spaces for electric cars, CCGI responded by purchasing NYC's largest EV charging provider, Beam Charging. Establishing itself in one of America's premier cities for EV growth will prove to be financially beneficial for CCGI as more than half of NYC drivers have assigned parking which could mitigate the difficulties of home charging for multi-unit structures.

With the latest acquisition of 350Green, CarCharging became the largest independent public EV charging station network in the US and the world. The company continued consolidating the market by increasing its presence for the upcoming materialization in electric vehicles. This way, CCGI grows when the demand is present or soon approaching, instead of unsustainably expanding without the proper need of their product/service.

Though not an acquisition by definition, the joint initiative between Nissan (OTCPK:NSANY) and CCGI to deploy 48 quick chargers in developing US regions validates two points. The first is the importance of CarCharging Group to the development of EV market in the US. The US government and Nissan have portrayed how crucial it is for CCGI to expand consumer awareness of the electric car market by making more charging stations available. Secondly, the growth of the Leaf and overall EV sales are for real. With more than 25,000 Leafs already on US roads and 48 Nissan-branded quick chargers, Nissan expects its triple digit annual growth figures to continue into the remainder of 2013 and onto 2014. The company's installed quick chargers are located in the two regions where most Leafs are sold, California and East Coast, with intention of being utilized by Nissan drivers.

Given Ecotality's current situation, and potential looming bankruptcy, it may not surprise investors to see CCGI throw up their hand for a bid at the auction for Ecotality's assets. This is not the first time the company has taken a stab to acquire a failed giant. Earlier in the year CCGI attempted expansion by bidding on another bankrupt Israeli EV firm Better Place. Considering that CCGI currently owns some Blink series charging stations from Ecotality, the acquisition would seem all the more likely in the event of Ecotality's bankruptcy.

Concluding Thought

There are many takeaways from Ecotality's failure for investors partaking in the growth EV infrastructure segment. As we witnessed, sumptuous government spending can mislead a company in a developing market by building a business around unsustainable financing. In turn, investors who have successfully done their due diligence get caught in the crossfire when a company is making claims that may not necessarily be true. In comparison, companies like NRG and Car Charging Group, have fine-tuned their business models to avoid the same fate as their fallen competitor. Though the future of the EV may be uncertain, we can undoubtedly expect NRG and Car Charging Group to lead the pack of infrastructure developers if the anticipation for the EV is indicative of the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.