Octus Announces Merger, Investment Agreements

As the opportunity to help building owners slash their utility bills magnifies, in concert with maturation of Octus's retrofit and financing offerings, we took an important step last week, executing definitive agreements to acquire two companies and receive necessary growth capital. Here's a synopsis of the news release (full version here at Yahoo Finance):

Octus, Inc. (OTC.BB:OCTI - News), a leading building efficiency company, today announced the signing of a definitive agreement with Alternative Energy Partners, Inc. (OTC.BB:AEGY - News) to acquire one hundred percent of Élan Energy Corp. and Sunarias Corporation in exchange for common shares of Octus. AEGY previously acquired Élan Energy Corp. and its operating subsidiary, R.L.P. Mechanical Contractors, Inc., in a transaction with a stated value of $5 million, and acquired Sunarias in a transaction with a stated value of $2 million.

In addition, Octus signed a definitive agreement with Lin Han Equity Corporation to transfer majority ownership of Octus to Lin Han, in exchange for common stock in privately-held Healthcare of Today, Inc., and working capital to fund Octus's growth strategy.

"The addition of Élan Energy, a proven, profitable and vibrant HVAC and refrigeration efficiency contractor, immediately boosts Octus's financial strength, customer offerings and market reach," said Octus CEO Chris Soderquist. "Market demand for combined energy and water-saving solutions, coupled with utility company rebates and project financing, has increased steadily in the last few months and these transactions will enable Octus to aggressively pursue existing and new business opportunities."

It's an exciting time to be involved in the energy- and water-efficiency industries. On top of several new developments at Octus, these transactions (targeting a close of March 15, 2011) will propel Octus's growth and enrich our offerings to building owners. More to come.

Small Business Energy Efficiency: Utilities Court a Historically Underserved Market

Around the country, a quiet revolution is taking place. Small businesses - who at times have played the part of ugly stepsister in the energy efficiency dance - may finally be getting their invitation to the ball. As utilities seek to reduce their customers' consumption of energy (for regulatory compliance or to postpone costly infrastructure upgrades), they are extending a hand to the 22.9 million small businesses country-wide with incentive programs that better meet the needs of these smaller consumers.

"From the neighborhood pizza parlor, dry cleaner and grocery store to service, health care and technology companies, small businesses have become the cornerstone of our economy. However, with all of this power to drive economies, small businesses have been left out of many cost-saving programs. This is especially true with utility-sponsored energy efficiency programs. Why? Small commercial accounts are very disparate and (until now) have been difficult to segment into actionable groups by utilities. Data about these small commercial accounts are often incomplete and difficult to gather, and yet, this is a sector that has great potential to help the environment by becoming greener -- and add precious dollars to their bottom lines."

A huge sector of the economy whose participation in energy efficiency can make a significant impact on the environment and their own financial health? It's hard to imagine that more effective utility programs haven't yet been delivered. Much of this is due to the split incentive (i.e., many small businesses do not own the properties they utilize, and thus are reluctant to invest in facility improvements) and a lack of quality information:

"Typically, utility data consist of the business' name, primary contact, phone number, address and type of business... This lack of information leads to another roadblock to outreach: the current benchmarking process. Utilities review year-over-year data on a business. Did a specific business use more or less energy last year? Have there been unexplained spikes or troughs in consumption? If there were more data points to consider and analyze, the utility would be in a better position to offer customized information about energy usage and recommend energy-efficiency programs; thus, truly offering something useful and economically sound to the business owner."

Thankfully, new technological developments will make it easier for utilities to build a solid knowledge base about their small commercial customers, which in turn will allow them to offer more customized and enticing incentives that speed attainment of the utility's own goals. And, the financial equation is only improving: Utilities are developing more lucrative rebates and incentives, and new financing programs (such as Octus's Building Energy Savings program, PACE financing, and utility-company on-bill financing) are proliferating.

We at Octus have seen many investor- and municipal-owned utilities get in the game by designing and delivering programs with the small commercial customer in mind - programs such as Roseville Electric's Small Business Commercial Lighting Program, for which Octus was one of four approved energy efficiency specialists. But we believe that the utilities are just warming up. And as their ability to better segment and target this diverse - but enormous - slice of the economy grows, so too will participating small business' bottom lines.

Commercial Building Energy Efficiency Retrofits: $190 Billion Market

How big is the market for energy-efficient retrofits of commercial buildings? In a word: Immense. In numbers: Tens of billions of dollars, as we've quantified in previous SmartEnergyWorks posts. As ambitious and bullish as we are at Octus about the market -- and our opportunity to build an extraordinary business -- the Urban Land Institute just upped the stakes.

According to ULI, and as reported in SustainableBusiness.com, the market potential for energy efficiency retrofits in commercial real estate is projected to total $190 billion over the next ten years. From the article:

... the sheer size of the commercial real estate sector's carbon footprint illustrates the potential of energy-efficiency measures to make a dramatic impact on reducing emissions. The nation's approximately five million commercial buildings are responsible for 18% of total annual energy consumption in the U.S.; moreover, only 7% of those buildings represent half of the overall floor area of commercial buildings.

Investing in energy efficiency in real estate--an emerging practice with great market potential--requires new business practices and government incentives to overcome investment barriers. "Recent efforts to catalyze investments in energy efficiency in buildings have challenged how policy makers and market participants view real estate finance and valuation practices," the report says.

"Are investments in energy efficiency to be approached as a discreet value capable of being financed independently of the underlying real estate asset, and then traded as "efficiency-backed" securities on secondary markets? Or, is an energy efficiency investment to be treated in the same way a lobby upgrade is, which without question drives new value to the real estate asset? The answer is both, as policymakers work to unleash market forces to reduce energy demand."

The reports states that innovation in this emerging investment market requires evidence of real costs and returns. Information now available on building performance indicates that feasible energy retrofits for an individual building typically save 20% to 30% and in some cases as much as 60% of energy use, depending on a building's age, type, design, condition and maintenance.

As we discussed a few weeks ago, several energy efficiency project financing vehicles (including the Octus-Five Star Bank Building Energy Savings program; click here for a recent Business Journal article) are emerging. Coupled with increasing incentives and rebates from utility companies, the market is ripe, albeit with barriers. The ULI report echoes our thinking: there is a strong business case for commercial real estate owners and managers to incorporate energy efficient practices in their business strategies:

• Operating-cost reductions through energy savings in an era of tighter budgets
• The creation of reputational advantage in the context of evolving voluntary and regulatory emissions reductions targets
• The creation of new markets or lines of service leading to economic expansion
• Improved tenant working environments, leading to employee retention and higher productivity
• Lower building vacancy rates and tenant turnover
• Reduced business risk in the midst of energy price volatility and changes in consumer preferences regarding green building
• Reduced reputational risk in a globalized, increasingly transparent marketplace.

As SustainableBusiness summarizes, the report cites the need for a change in the perception of energy efficiency as an "investment in less," as in less environmental impact, to an "investment in more," or an investment that produces more value and cost-saving.

We could not agree more.