The Polar Vortex is gone, but New England still has an energy problem.
The closure of large-capacity nuclear and coal power plants in the past 24 months has forced natural gas to step in to fill the gap for electricity generation. However, New England doesn't yet have the pipelines in place to transport the cheap natural gas -- extracted from major shale deposits just several hundred miles west -- to the shiny new gas-fired power plants erected in anticipation of the changing market. Cold winters have further exposed the region's lack of natural gas transportation infrastructure, which has resulted in the nation's largest ever price swings for businesses and residents using gas heating systems.
Yet as bad as the seasonal volatility sounds, natural gas is still a cleaner and cheaper heating option than fuel oil and coal, especially for industrial customers that require heat year-round for process-related purposes. But if companies aren't lucky enough to be located next to one of the few natural gas pipelines, then they aren't able to enjoy the economic benefits.
Well, that was true before Clean Energy Fuels (NASDAQ:CLNE) got involved, anyway. The company is looking to exploit the market inefficiencies with its latest investment and bring year-round relief to industrial customers -- no heavy-duty trucks required.
Beyond the pipeline
A few months ago, Clean Energy Fuels acquired a controlling interest in NG Advantage, which has built a "virtual natural gas pipeline" for industrial heating applications throughout the Northeast. What the heck is that? The virtual pipeline is a trailer or system of trailers retrofitted with gas-compression and storage equipment that is stored onsite of industrial customers such as hospitals and paper mills. Trailers are refueled with recurring deliveries -- and therefore generate recurring revenue -- of compressed natural gas, or CNG, to meet each customer's heating needs.
It's an amazingly simple solution for economically stranded businesses, or those unable to enjoy the competitive advantages of low natural gas prices because they're not located near a pipeline. The company states that its customers saved 20% to 30% of their energy costs and reduced carbon dioxide emissions 26% by switching from coal or fuel oil to the virtual pipeline.
Customers aren't the only ones benefiting from the mobile infrastructure. Clean Energy Fuels began generating revenue and earnings from the acquisition the minute the ink dried last October -- and both should continue to grow at a healthy clip going forward. The investment in NG Advantage will be used to fund expansion projects in New England and in other regions facing similarly lacking infrastructure and supply bottlenecks.
The acquisition also included the 16 million-gasoline-equivalent-gallon CNG station in Milton, Vt., which instantly became the largest in Clean Energy Fuels' nationwide network. Better yet, the compressor technology operated at the company's other 500-plus stations churns out CNG at exactly the right pressure needed for the virtual pipeline. That means regional CNG refueling stations should easily help the company grow its industrial customer base -- and expand to larger customers.
Good news, bad news
Seasonal volatility in New England could hurt Clean Energy Fuels' efforts to expand the virtual pipeline, too. After all, the company buys natural gas from regional pipelines and suppliers before compressing it at its fueling stations and reselling it to trucking (and now, heating) customers. Those are the same regional pipelines that have trouble keeping up with demand during cold winter months. In other words, when natural gas prices spike in New England, input costs for Clean Energy Fuels spike as well.
Additionally, it may not make sense for certain customers to make the switch to the virtual pipeline in 2015. Falling crude oil prices have taken fuel-oil prices along for the ride, which has resulted in a 14% drop in heating expenses compared with last year. That could swipe away a large pool of potential customers for Clean Energy Fuels in its first year of growth with NG Advantage. The price of petroleum will eventually climb back over $100 per barrel, but the decision to switch to natural gas in the near-term just became a bit more complicated.
What does it mean for investors?
Clean Energy Fuels may be closely associated with natural gas fuels for the trucking industry, but investors won't have much to complain about with the strategic investment in NG Advantage for heating needs. Thanks to a lack of pipelines and infrastructure, New England remains stranded from a natural gas supply standpoint, which excludes many businesses from enjoying the economic advantages of cheaper and cleaner heating options.
There are some obstacles to overcome, such as increased raw material costs when Clean Energy Fuels purchases natural gas for its fueling stations from supply-strapped pipelines in the region. The pool of potential customers may also be smaller in the near term, as fuel-oil heating costs have dropped significantly in the past several months compared with previous winters. Despite the minor headwinds, I believe the strategic investment in NG Advantage is a net benefit for investors, especially in the long term, although we'll have to wait for the next update from management to gauge expectations for the year ahead.