Source: Streetwise Reports 04/02/2020
This project, along with two other new projects, increases the company’s order backlog by 65%.
UGE International Ltd. (UGE:TSX.V; UGEIF:OTCQB) announced the signing of an agreement for its largest U.S. project ever, a 6.6 MW project in Westchester County, New York. Located on a corporate campus, the project will feed energy into the grid while providing energy credits to community solar subscribers at a discounted rate.
“The project is approximately 12-15 times the size of UGE’s average project and, when completed, will produce power for an estimated 1,000 homes for the duration of the system’s lifetime,” the company stated. The company also has the option of installing battery storage, “which would provide a further boost to project revenue and returns.”
The company also announced two additional projects, the first a 1.7 MW, nine-site portfolio in New York City using leased building rooftops. It is also a community solar subscription program and gives residents the “opportunity to save on electric bills through solar energy.”
The third project is to develop, build and finance a community solar project in Maine. The 1.1 MW project will have its electricity feed directly into the grid. “In the past six months, Maine has become a top community solar market and UGE has affirmed itself as a leading market participant, with a pipeline of opportunities throughout the state,” the company stated.
The three projects provide a total capacity of 9.4 MW, “with an estimated present value of almost USD$20 million across the portfolios.” The projects should be completed by the end of 2021, the company asserted.
The company also announced a 250 kW project in Westchester County, N.Y., just one day before the above announcement of the 6.6 MW project.
“UGE continues to see growing demand, even in the face of the sudden downturn in the economy,” said UGE’s CEO Nick Blitterswyk. “Community solar allows real estate owners to boost revenue by receiving lease payments for their empty rooftops and open land, which is especially attractive during a time when their revenue may otherwise be decreasing.”
UGE has been in the commercial and community solar space for over a decade, and as the industry has changed, UGE has changed with it.
The company develops, builds and finances commercial and community photovoltaic solar systems and is active in the U.S., the Philippines and Canada. The company began by engineering and constructing projects for solar developers but came to the realization that it could achieve higher margins by developing, building and financing the projects, so in early 2019, UGE stopped building projects for other solar developers.
The model that UGE has developed in the U.S. and the Philippines, Blitterswyk told Streetwise Reports, “has three pillars. We originate and develop the project—in our industry business development is like the secret sauce—then we build the project and the third part is we finance the project, retaining ownership. Doing this gives us the highest gross margins as well as recurring revenues.” The company can issue green bonds to fund a project and then reap the revenue over the lifetime of the project. About half of UGE’s 2020 projects fall under this model and provide gross margins in excess of 23%.
“We are actually playing the role of the financier here, and structuring the finance to capture as much as we can out of the projects, including recurring revenue,” Blitterswyk explained. “We started playing that role at the end of 2019 and now we are the financiers for a good majority of our projects.”
Some of UGE’s 2020 projects use the develop, build, sell model, where UGE develops, constructs and sells the project, either to an investment fund or to the client. This type of project returns gross margins in the 20–25% range.
In many cases, UGE is setting up community solar projects, where the company rents a location, often rooftops, constructs a solar system, and then sells the electricity to local community members. It currently has about 30 such projects in its backlog.
On April 2, UGE announced that it closed financing and commenced project deployment on two community solar programs in New York City, one in Queens and one Staten Island. “Together, the projects are expected to generate approximately US$120,000 in revenue for UGE in year one, and over US$3.3 million over their lifetime. The projects are primarily funded by project-level debt in the amount of approximately US$0.5 million,” the company stated. Both are expected to reach commercial operation in 2020, “further adding to UGE’s base of recurring revenue.”
“We’ve rapidly scaled up. 2018–2019 was a transition period to a development-driven model, where we focused on securing self-developed projects with higher margins, decreased our overhead by more than 30%, and cleaned up our balance sheet, including converting US$5.25 million debt to equity,” Blitterswyk explained. “The debt holders took long-term equity positions in the company in the process, taking equity at what amounts to a CA$1.00 share price.”
“In 2020, we are focused on driving profitable growth, increasing our gross margins, growing recurring revenue through project ownership, and keeping our overhead low,” he added.
With the recent wins, the company has a current project backlog valued at approximately $50 million, spread out over more than 40 projects, and a pipeline in excess of $250 million.
The latest projects follow a series of new contracts UGE announced in February. One is with Wildflower, a repeat client, to construct a 100 kW system on the roof of a storage facility in Holbrook, N.Y. The construction of the system provides additional revenue to the building owner while complying with the Climate Mobilization Act, which requires new construction in New York City to “adopt prescribed sustainability measures.”
Two additional projects are in the Philippines, where the high price of electricity makes solar projects very cost effective. UGE will construct a 100 kW system for the Cebu Institute of Technology and a 200 kW project for Lite Properties, to offset the electrical load of Lite Port Center, “eliminating its exposure to the high electricity rates on Bohol Island.”
“Looking ahead, we’ve done the hard work necessary to transition to the development model, and we expect our margins and recurring revenue to really increase as we play the role of financier,” Blitterswyk explained.
“Of our $50 million backlog, we expect about one-quarter will be fulfilled in 2020 and the remainder in 2021, so we are looking at 80 to 100% growth in both 2020 and 2021,” he stated.
Selective Asset Management has taken a position in UGE International and Robert McWhirter, F.C.S.I., CFA, Selective Asset Management’s president and portfolio manager, explained why he has invested in UGE. “The Philippines, which does not have any solar subsidies, comprises about one-third of UGE’s revenue, and even without government subsidies, installations in that country make economic sense.”
“In New York City (NYC) new buildings that are over 25,000 square feet must have solar or a green roof. UGE estimates that NYC is a $1 billion sales opportunity,” McWhirter stated. “In addition, UGE typically leases the rooftop and sells the solar at 20 to 21 cents US with prices fixed for the first 10 years of a 25 year offtake agreement. A median sized installation is 50,000 square feet with an NPV of $1 million. UGE is working with the New York City’s Economic Development Corporation and Con Ed.”
“Sales are estimated at CA$8.4 million in CY 2019, growing over 50% in 2020 and 2021 to CA$13 million and CA$20 million, respectively. With an enterprise value of CA$6.0 million, an estimated backlog that is almost 5X trailing twelve months sales, EBITDA profitability expected in 2020 and 50% estimated sales growth this year and next, UGE’s shares appear very attractive,” McWhirter concluded.
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( Companies Mentioned: UGE:TSX.V; UGEIF:OTCQB,
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