Interview with Gordon Bryant
Following is the transcript of a CFO Studio interview with Gordon Bryant, CFO of Pfister Energy Inc.
Visit www.CFOstudio.com to read about this interview and to watch the entire on-camera interview.
Financially Thriving as an Alternative Energy Company in Today’s Market
Host: Welcome to CFO Studio. Today we are joined by Gordon Bryant, Chief Financial Officer of Pfister Energy. Gordon has a BA from Murray State University and an MBA from Wharton. He has three decades of financial experience, including serving as Senior VP in Investment Banking at Lazard Freres. And the east coast director of structured finance at SunPower. Gordon is a member of the Association for Corporate Growth and Mercer Investors of Princeton New Jersey equity investor group. Pfister Energy is a New Jersey based alternative energy company that specializes in stackable technologies in the renewable energy sector. Today we will be talking about financially thriving as an alternative energy company in today’s market. Gordon thanks for coming by, thank you so much.
Bryant: It’s a pleasure being here.
Host: Yup, Um, I just want you for a second, if you could, cause I gave a brief introduction and description of Pfister. Could you explain in a little more depth for our viewers what the company actual is and does?
Bryant: Sure David. Pfister Energy is an alternative energy company which does a lot of solar power work but we also provide a broad range of alternative energies solutions that we characterize as stackable technologies to best meet the needs of our customer. Those solutions may include solar pv, solar thermal, wind, energy efficiency, rain water harvesting, day lighting and could also include fuel cells and backup emergency generation.
Host: So you guys really do it all.
Bryant: Pretty much.
Host: Pretty much.
Bryant: We don’t do nuclear power yet.
Host: Ahh, interesting. But, you’re getting there maybe one day.
Bryant: It’s possible.
Host: Good, Um, so let’s jump into it. State and federal financial incentives for alternative energy projects have generally had a declining trend. How does a small east coast based alternative energy company survive and thrive in that kind of environment?
Bryant: We’ve heard a lot I think from folks who are just in the solar power industry about how the markets have deteriorated particularly in places like New Jersey and Pennsylvania, even in Massachusetts due to decline in financial incentives for solar power. I think there are three pronged strategy approach that a company needs to have to survive and thrive in today’s market. One is a very tight control on cost. And you can do that by having your own equipment and own construction crews. Secondly, a non-capital intensive means of expanding into different geographic regions so that you have geographic diversification without incurring huge amounts of cost for bricks and mortar and debt. And thirdly, and I think most importantly, is having a very strongly defined, well defined, strategic market differentiation approach. For Pfister Energy that means stackable technology approach where we combine different alternative energy technologies to reduce the payback period for our customers. So that even in a time of declining financial incentives the projects still makes economic sense.
Host: Great, So accelerating that payback is really key.
Bryant: That’s a big point.
Host: Big point. Um, so, what is the distributed generation sector of the solar power market and why is the sector often viewed as underserved by financial markets and, you know, maybe throw a couple potential solutions in there for us.
Bryant: Sure, well first let’s start off maybe by the 30,000 foot level. Distributed generation is the way that power generation started out, for the whole industry under Thomas Edison. Direct current, um, the power generation was located at the site where the power was used. There wasn’t a need for transmission for all these power lines that are currently across the landscape. In the solar power industry we’ve seen the sectors typically divided up in the three, residential, commercial/industrial, which is typically referred to as distributed generation, and then large scale utility. Um, as far as financing goes, both the residential and the utility scale portions of the market have well established techniques to accomplish their financing needs. For the utility scale sector of solar power, we can simply utilize the project finance techniques that have been utilized traditionally for power generation for decades. For the residential scale, we can securitize to the individual the residential leases into something like a mortgage back security. It’s a distributed generation sector that has been underserved because the typical financing techniques and we could talk about later a little bit more about these, have been power purchase agreements and lease arrangement which are negotiated individually for each project, massive friction cost of time opportunity and capital just to get those done.
Host: So what is, I’ve heard you mention before in the past, crowd funding, JOBS act, what is that?
Bryant: Ok, right. Some of the um, legislation, that’s been recently proposed could provide good solutions for distributed generations financing. For example, in the spring congress enacted a law which is referred to acronym jobs act. Which will reduce the hurdles in accessing individual investors for projects. And enable so called crowd funding to occur over websites. There’s also legislation enacted [sic] to enable investors in alternative energy and solar power projects to utilize master limited partnerships, which have been successfully utilized in the oil and gas sector for decades. And currently that’s not available for retail investors but that legislation is referred to as the master limited partnership Parity Act.
Danick: So you’re drawing a little bit on the past and hoping to combine that with some future methods as far as that goes.
Bryant: That’s right, and we feel there is a huge pool of potential investors in the retail sector that it’s currently impossible to access due to the way that incentives are structured and current tax laws. And we could talk about that a little bit more.
Host: Ok, What do you think the most frequently utilized financing techniques for solar power projects are and what are the key advantages and disadvantages to those?
Bryant: Probably 80 % of solar power projects are financed with a power purchase agreement. And, under the power purchase agreement a third party, financing counter party, will monetize the tax credits and depreciation benefits and we could talk about what those tax credits are. The customer for the project then agrees to buy power under arrangement similar to what it has with its current utility. So the customer has no down payment to make, no capital up front and yet continues to make its power payments as if all the power was supplied by the utility. While a portion perhaps the bulk of the power consumed during the day is provided by the solar power.
Host: Interesting, so the trend, the underlying trend, is it seems is to make it easier that for that end user, that customer, and also less of a financial burden on that end user.
Bryant: Correct, there are other techniques that can be used if the customer wants to own the project more quicker, because power purchase agreements are typically a 20 or 25 year tenor. Lease arrangements can also be set up where the lease arrangement would be typically in the 7 to 10 or 12 year range.
Host: So you have a good amount of time to amortize the cost and pay them off.
Host: Great, So what is tax equity and why is that important for alternative energy?
Bryant: Right, when we talked about the power purchase agreement, we talked about monetizing tax, tax equity, and if you are a government, and you’re looking to encourage solar power, we still see solar power cost above what traditional fossil fuel market prices are.
Host: Especially that initial investment.
Bryant: So, there are a couple of ways to provide a subsidy. You could provide direct subsidies. You could require utilities to pay above market prices under feed-in-tariff and we could talk about what that is later.
Host: That was my next question.
Bryant: Um, or we could provide tax credits, and the problem with providing tax credits are that in order to utilize those, the user has to have consistent profitability over time. Most solar and alternative energy developers have volatile revenues and perhaps aren’t even profitable over that time period. So, we need to them turn to a third party provider, who can monetize the investment tax credit and also monetize the depreciation benefits. That may sound like a broad range of folks that are out there but typically we’ve seen a handful of financing companies and only a few corporations, Google is prominent there as one of the corporations that are involved in providing tax equity for alternative energy projects. So, there is some inefficiency in the use of tax equity some folks who’ve looked at this have suggested the inefficiencies add maybe as much as three to four hundred bases points in the cost of financing an individual solar project.
Host: Yeah, it’s interesting, I mean obviously most people think, let’s just put a panel on the roof and let’s go, but to just in any industry, any business, you have to keep those costs and checks in line and make it work and it seems like your company is really trying to pull it all together and combine all those different strategies to make it a viable alternative.
Bryant: I try to put myself in the shoes, David, of the CFO of a corporation. And, ask myself okay, if I were the CFO of XYZ Corporation in NJ, would I put solar on my roof? What would be the threshold questions I would want answered? What do I need to see to make that viable for me.
Host: Absolutely. So, my next question, what is a solar power feed-in-tariff, as you just mentioned, what are the key advantages and disadvantages of that?
Bryant: A feed-in-tariff is a situation where rather than having the customer of the project, the host of the project, paying for power, a utility pays at an above market rate. Feed-in-tariffs have successfully been used in Europe and Ontario Canada, and increasingly in jurisdictions in the US, although not on a national level yet. We’ve seen them used in Long Island, Gainesville Florida, they will be used soon in Georgia, the state of Georgia. Um, some of the issues are that the feed-in-tariff will have only a specified amount of volume that can be included because you don’t want obviously to have the utility having all its power at an above market rate. That would put the utility out of business. So the question is, how do you allocate projects to participate in this feed-in-tariff and what sort of basis is it done. And secondly, what we are also seeing internationally, as well as domestically, is that feed-in-tariffs either ratchet down in anticipation of lower cost of solar power or they’re set at levels while they are above current market levels are still relatively low. For example, I am from Kentucky originally, Kentucky’s power cost is around seven cents or so.
Host: That’s what it is in New York too.
Bryant: Yes, with a zero after it.
Host: Yeah, exactly.
Bryant: You can set a feed-in-tariff let’s say at ten cents, which would appear to be well above market in Kentucky, and yet ten cents in today’s market with today’s cost of solar power projects probably would not enable many projects to be completed in that state.
Host: Right, so you have to do a lot of due diligence, there are some limitations, you have to make sure that’s all working correctly. What if, I am sure you have a website, do you have a blog or any way that people that are interested in finding out more about that can pop on.
Bryant: Yes, for those viewers who might be interested in finding out more about feed-in-tariffs go to our blog, the website is pfisterenergy.com. And we have a blog entitled should there be a national feed-in-tariff for the US.
Host: Okay, great, that’s perfect. For investors interesting in investing, in alternative energy companies, what are the key issues to review. I mean, I want to invest in something maybe I know about, so I feel comfortable, alternative energy is something that’s definitely viable and definitely an investment possibility. But is there anything different or is it pretty much similar to other investments?
Bryant: Well. I think for any company you are looking to invest in, obviously you want to look at sustainable profitability. What is the likelihood the company can consistently grow its profits and continue to be profitable over the time period you’re looking to invest in. Alternative companies are a little bit different, one you’ve got the influence of financial incentives, which vary by jurisdiction. Although at the corporate and federal level, we do see investments tax, but that expires in 2016. One of the key things that I would look for is 1) What is the means of strategic market differentiation that the company has? I would also look at what are the geographic diversification means that the company has. Hopefully those are achieved without spending a lot of capital per quarter because those markets might change and you need the flexibility to meet those changes. Certainly, strength of management and vision are keys. So, those are the three things that I would look at.
Host: So, not so dissimilar from others, just a little less of a track record because it’s newer than some of the investments that have been out there.
Bryant: It’s not only newer, but there is also an element of commodity market risk in that you got financial incentives that change, and you’ve got pricing, particularly solar panels that rapidly change. So, it causes volatility in revenues, which have to be properly assessed and to some extent, you just don’t have a good handle on it. For that reason, it’s a little bit like investing with grains, soybeans, or corn, natural gas, or oil.
Host: Talk to me a little bit about financing issues that you face in the current market. I know that we read something about friction costs and things of that nature.
Bryant: Well, let me focus on the distributive generation side. One, that’s the market sector where I think it will grow most rapidly and yet is most underserved by financing so it has the greatest opportunity. One of my personal goals is to come up with the means to finance all these distributive generation projects with much lower friction costs and achieve more closings. Currently, we need financing counterparties to monetize the investment tax credit and depreciation benefits. That has to deal with the way the federal government has set up incentives. The investment tax credit accounts for 30% of the project cost. So, if you’ve got a $9 million project, $3 million of that comes from the investment tax credit. It’s very important that you be able to monetize that. Under the non-feed-in tariff, where the customer buys the power, the financing counterparty has to look at each individual customer and decide if that customer is credit worthy. It’s an easy decision if that customer has investment ratings from a public rating agency, but the majority of the customers in the distributive generation sector may not have that. So, how do you then assess the credit quality of the customer? That’s a labor intensive process for the financing counterparty. Secondly, you want to make sure that the customer’s needs are met, both in tenor and what is required. In particularly, when you are looking at a power purchase agreement, you’ll see many customers with a contract that can be negotiated, but in many ways, a power purchase agreement, I’ve told many potential customers, is that it’s a little bit like an automobile engine. I remember when I was ten or eleven. I wanted to make my dad’s car go faster. I’m not sure why.
Host: Because you we’re going to be driving it.
Bryant: Well, I was going to be driving it soon. So, I noticed that there was a lot of extra belts there and I thought that I reduce some of the belts and that would free up more horsepower for the engine. If you take off the belt that drives the generator, it’s not going to charge the battery. If you take off the belt that drives the fan, it’s going to overheat. There are provisions in a power purchase agreement that are there for one of three reasons, either for accounting reasons, because the federal tax code requires them, or the investor needs them for his credit purposes. So, those are problems that you encounter in individual financing in today’s distributive generation market that we’re seeking to overcome.
Host: Fantastic. So, talk to me a little about growth, sales, acquisition, how do you grow Pfister?
Bryant: Well, I think there is only really three ways to grow any company: sales, licensing, or acquisition. Typically, acquisitions and licensing have sort of been lumped together in business development in a sense of non-sales. I think that the easiest first thing that most companies will think of is getting a huge sales force and just beating the streets and trying to identify appropriate customers and reach them. That’s a very viable approach. I think a non-capital means of expansion into different geographic regions makes a lot of sense, particularly in the alternative energy sector where you can see local market incentives turning on and off. And, finally, acquisitions are a viable approach because you can acquire an additional customer base, maybe even new technologies. However, studies have pointed out that typically the majority of acquisitions probably fail over time due to clash in culture.
Host: I think I found that as well. I think culture clash can be the downfall of what looks good on paper, an acquisition. I think we have time for one more question. So, obviously you are very busy and you’re juggling a lot of stuff every day at work. What do you think are typically at the top of the list for a finance officer at a company like yours and what keep you up at night? It sounds like you never sleep.
Bryant: Well, I do have twin sons in college, so that does keep me up a bit.
Host: That would keep me up, too.
Bryant: So, finally a question about me. I think that the biggest issue that I probably deal with is making sure that I can get financing in proper terms that meet the customer’s needs, that make the economics work, and also maintain a long-term relationship with the financing counterparties because the last thing I want is for financing counterparties to incur what I would call “investor fatigue.” ‘Well, you showed us five other projects that we’re kind of iffy from a credit standpoint and now you got this other project. We’re not so sure that we’ve got time to look at this.’ So, obtaining financing while minimizing the friction costs is important because to me, the highest pinnacle of my career and the most important, fulfilling thing for me is closing a transaction that meets the customer’s needs. It’s a balancing act, but it’s very fulfilling when you get there.
Host: It’s almost art meets science.
Bryant: Other issues in today’s market, insurance issues have always been somewhat of a concern because the alternative energy is relatively new and I am not sure that every insurance company is comfortable 1) where to categorize these folks and 2) how do you evaluate the risk. I would are argue that risk of doing an alternative energy project are very low, particularly solar projects. There’s no moving parts, there’s no combustion, there’s relatively little maintenance required, and the solar panels will typically be producing power for 30-35 years.
Host: Yea. That’s fantastic. So, we’ll get them one at a time, but we’ll get them. Gordon thank you for coming by. I really appreciate it. This is David Danick with Gordon Bryant of Pfister Energy saying thank you very much for watching, we’ll see you again soon.
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