RealEnergy Inc.
Year Founded:
1999
Core Business:
Installing generators that convert natural gas into electricity for commercial buildings
Revenue in 1999:
$0
Revenue in 2001:
$6 million
Employees in 1999:
4
Employees in 2001:
22
Goal:
To install 500 megawatts within first 60 months
Driving force:
Commercial building owners’ need to find a cheap and reliable energy source that doesn’t depend on the power grid
Financed by a group of clients, a start-up energy firm aims to increase office buildings’ efficiency
If you want to build a company that needs $50 million, you’d better have a client base already lined up even if it’s the investors themselves.
Meet Dan Cashdan.
With the backing of energy companies, real estate concerns and investment banks, Cashdan, former senior vice president at AEW Capital Management LP in Los Angeles, started RealEnergy Inc. in 1999.
RealEnergy isn’t a technology company or an engineering company. It buys natural gas-fired generators, leases roof space from building owners, installs the generator through partners and sells electricity to the building owner in much the same way the Los Angeles Department of Water & Power or Southern California Edison Corp would.
What’s more, it charges the same rates as existing utility providers. So what’s the lure? There are cost savings (the generators also heat water in the building, aiding heating and cooling efficiencies), but the real key is reliability for building owners.
The conversion of natural gas to electricity through an on-site generator provides 50 percent of a building’s electricity on a permanent basis. It also lets building owners use heat generated through the conversion process that would otherwise be released into the air, said Bob Miller, senior vice president of Hess Microgen LLC.
Hess Microgen is a wholly owned division of New York-based Amerada Hess Corp., an oil and gas exploration company, and the primary manufacturer working with RealEnergy.
Cost of entry
RealEnergy shells out between $1 million to $2 million for each generator installation, taking on all the work a building owner might do. That means buying the generator, installing it and signing the permitting paperwork with the existing utility.
Plus, RealEnergy throws in some additional revenue for the building owner: a lease for the space its generator occupies on the roof.
RealEnergy guarantees that kilowatt costs will never exceed those of public utilities not a huge stretch, since it doesn’t have the same transmission costs as the big boys. And because it sells the heat created during the generation process as opposed to wasting it it has an additional, cost-free source of revenue.
“RealEnergy is pioneering the practical steps of signing up customers, negotiating for the fuel and natural gas, handling the complex permitting and managing the operations,” said Lawrence Gilson, chairman of Los Angeles-based GFI Energy Ventures LLC, co-general partner with Oaktree Capital Management LLC of a $554 million fund devoted to energy investments.
The equity firm plugged $25 million into RealEnergy in March, along with Arden Realty Inc., Credit Suisse First Boston, Detroit Edison, Divco West Properties of San Jose and Global Innovation Partners LLC, an equity fund that includes the California Public Employees Retirement System and CB Richard Ellis. The latter investors added another $25 million to RealEnergy’s second round of financing, which was one of the largest rounds in Los Angeles in the second quarter.
Those investors make up RealEnergy’s client base so far.
Last week, the company turned on three generators in Los Angeles. About a month ago, it set up a generator in Marina del Rey and has four others under construction in Orange County.
Cashdan said he expects the company to move outside its investor base within the year. He’s confident enough to project a $30 million installed base the amount RealEnergy will spend on installations by the end of this year.
RealEnergy expects revenues at a rate of about 20 percent of the installed base costs for as long as the building uses the generator. This year that translates to about $6 million in revenues.
By the end of next year, he expects $100 million to $120 million in installed base, or $20 million to $24 million in revenues. The company expects to have operating profits by the first quarter of next year.
Assuming risk
The use of alternative energies or co-generation, using the byproducts of one fuel source to generate other forms of energy, is not new car makers have been developing alternative energy methods for years.
But RealEnergy is not betting on technology. It’s betting that building owners, interested in reducing costs and headaches, won’t care what technology is used as long as it works for them.
“We felt RealEnergy had a solid approach to the market,” Miller said. “They had solid real estate contacts and a reasonable business plan.”
In fact, Miller said the real estate contacts are what prompted Hess Microgen, which sells its machines directly to East Coast clients, to work with RealEnergy on the West Coast.
That could be RealEnergy’s best sell. “It’s a big market,” Cashdan said. “But our investment base is 1 billion square feet. It’ll take years to get through that.”
