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I mentioned a couple months ago, when looking into the potential gains to be had from California environmentalism, that I had come across an interesting power plant aggregator called MMC Energy (MMCN.OB). I've since taken a little time to look at this company in more detail, and I'm ready to open a small exploratory position.

What is MMC Energy? It is a very small company (just about $75 million market cap at this point) that invests in small power plants in high demand areas. So far, they've got plants in California (two in San Diego which are online now, one in Bakersfield that they're recommissioning and hope to have online in January), and they continue to focus on acquiring what they call "deep value" generation assets in all the areas where high population growth and significant NIMBYism make it hard to build new power plants (mostly California, Texas, and the Northeast and Mid-Atlantic regions).

The San Diego plants, for example, were bought for about $30/kw, versus construction costs for those plants of closer to $700/kw in 2001, according to the company. They backed out of a deal to buy a plant in Utah, for reasons I'm unaware of (though it certainly doesn't fit into their stated geographic focus, so perhaps that's reason enough). Though electricity distribution is a near-monopoly in many places, deregulation and other factors in recent years have led to there being literally hundreds of very small independent (or owned by utilities but "expendable") power generation assets in just the high-growth areas that MMC targets, so they have lots of potential acquisitions (their own estimate is a minimum of 900 plants in their target market).

The small plants they're now acquiring are natural gas-powered plants, and in the case of the San Diego plants they're both trying to expand the plants with additional turbines, and pre-sell power or enter into supply contracts to be available for peak usage times. For their newest plant in Bakersfield they're also considering further partnerships with the local Chevron (NYSE:CVX) assets to possibly sell steam and excess energy to them.
MMC logo
The idea of the Resource Adequacy Contract is interesting, because in the case of these smaller natural gas powered plants, MMC can basically make a pretty good amount of money just contracting to be available at a moment's notice (typically, more like ten minute notice) to fire up the turbines to supply power during peak demand periods, typically in the summer, and prevent blackouts.

Utilities are required to have extra capacity available to them, and they use these contracts essentially as insurance. MMC will then get paid for the power they generate as well as for their general availability, including daily sales of excess capacity that are auctioned in the spot market, but much of the time it appears that these smaller plants can be run remotely and only used for a portion of the year.

I'm still learning more about the business, but I like the management team and their years of experience in the electric power industry, and I'm very encouraged that they've contracted with Bear Stearns to manage their power sales . I may be reading too much into this, but that tells me that they have some significant growth in mind, and that Bear is interested in growing along with them (their current asset portfolio doesn't necessarily seem like enough to warrant having someone else manage their power sales for them).

Finally, as some icing on the cake, MMC has applied for an AMEX listing and expects to be listed there by the end of the year, which would still leave them in the small time but would at least move them off the bulletin board and make there shares a little easier to trade (and more palatable for the institutions).

MMCN is on the verge of being profitable, and should have a good year next year as they've pre-sold resource adequacy contracts for their two main San Diego plants for close to $3 million to provide some nice baseline revenue even before they generate a single watt of electricity.

But with all the expansion they have planned, it's very hard to come up with a reasonable valuation for the company. At these prices near all-time lows for them (not that big a deal, since they've been public less than a year), and before the AMEX listing that will give them significantly more visibility, I'm willing to take my first bite. I'll post the actual price I pay once the purchase goes through.

MMCN.OB 1-yr chart:

MMCN Chart