Agora Response Dear Thermal Energy Investors,
Tim Angus and his staff have taken the time to answer questions that have been posted on our site. This has been a long time coming but Tim and his staff wanted to be as informative as possible for our shareholders
RESPONSE to QUESTIONS DATED MARCH 21, 2005
(Questions are a combination of those posted on Agora and other Bulletin Boards)
Question #1:
“Thermal does not seem to currently see a lot of competition against Flu-Ace. A shareholder seems to have identified a number of companies which offer various heat recovery solutions and which he thinks are in direct competition”.
TMG response to #1:
There are some competitors that would be classified as “heat recovery product suppliers” for the “clean boiler flue gas” market but these products compare poorly to Thermal Energy’s offerings due to their substantially lower heat recovery and heat exchange efficiencies as well as their reduced scalability and less flexible capacity modulation capabilities. Because of these differences, these competing products have limited applications and are used primarily in situations where one heat recovery unit recovers heat from one clean gas boiler at a time to heat or preheat water. These competitor installation sites are also typically of a smaller scale than FLU-ACE® installations.
If one is conversant technically with the capabilities of Thermal Energy and is able to study and evaluate the competitors’ product engineering performance data, literature, and reference sites it would be seen that, from an engineering point-of-view, these products and customer solutions are very different from FLU-ACE in many respects.
By comparison to the above Thermal Energy’s FLU-ACE® solutions are:
• More efficient with 30% to 50% better energy recovery efficiency and yield substantially higher water temperatures (typically 10°F to 20°F hotter), which are suitable for such applications as:
o Process Make-up Water
o Heating
o Boiler Make-up Water Heating
o Process Liquid Heating
o Dryer Make-up Air Heating
o Combustion Air Heating
o Ventilation Make-up Air
o Heating
o Mixed Air Heating
o Perimeter Radiation Heating
o Domestic Hot Water Heating
• More cost effective through higher short- and long-term energy savings
• More adaptable because a single large FLU-ACE® can process flue gases emitted from multiple boilers (usually three or more) on a fully modulating basis
• A distinctive integrated combination of heat recovery with air pollution control in a single FLU-ACE unit
• Fully capable of replacing the entire boiler plant smokestack for environmental purposes
This powerful combination of features, along with Thermal Energy’s wealth of application experience and creative engineering design approach to solving customer problems, gives Thermal Energy a distinct competitive advantage over competing heat recovery product suppliers.
As a result of the competitors limited heat recovery product performance and restricted solutions capabilities; it may be found that none of these competitors have achieved significant “clean hot flue gas market” success in the USA or Canada, and that the oldest listed competitors either cannot or do not rely on only their heat recovery products to sustain their business. In fact, over the past 10 years, some competitors have evolved into “wastewater treatment, water reuse, and water heating manufacturing companies that also still offers a stack economizer product”.
Also, none of the “flue gas heat recovery product suppliers” listed are offering any significant air pollution control through their heat recovery products although some do mention the option of combining their clean gas heat recovery product in series with a separately purchased air pollution control product. In spite of this claim these competitors do not seem to have any such reference installation sites.
As to the comments regarding one of the companies “having a long lead on TMG in the Pulp & Paper industry”; this statement is simply incorrect. From a review and analysis of these companies websites and their case histories, one had a single “district heating boiler flue gas heat recovery” installation in Seattle, Washington, it would seem that this competitor has not yet installed or perhaps only sold one heat recovery system to the pulp and paper industry. This company has only been in business for four years, since 2001, and they appear to be a small regional market player in the Seattle area.
With respect to the comment that “these are just a few of the larger competitors who have been in the business for a long time, there are many more and the number is growing”; we believe this to be incorrect. For the past twenty years, it has always been the case that you could count on one hand the number of “condensing heat recovery product supplier” competitors, and it should be noted that the number of competitors has not grown significantly in that time. Nevertheless, we are fortunate to be involved in a multi billion dollar sector, which is growing rapidly. For this reason, a growing number of competitors is healthy for the industry. As the number of competitors grows, so does the main stream acceptance of our type of solution. We are extremely confident in our ability to outperform competition, therefore overall an increase of competition is welcomed, as it would likely help us to grow our business exponentially.
Since the competitors seem to offer lower-end, less efficient, and limited application type of heat recovery product they do not pose a significant competitive threat for the medium to large scale commercial and institutional heat recovery solution market. This higher end market requires a more comprehensive, more efficient, more scalable, and more economically adaptable solution; one that presents significant advantages over anything the competition can offer. In short, the kind of comprehensive solution that Thermal Energy currently offers and is ideally suited to deliver.
Question #2:
“Although the company has sold one product per year for 18 years and most of them do work (I say most of them because when I was investigating I found that one of the units at Ford does not work and likely never will), there are other companies in the market with much better track records. The word I received was that flueace was overpriced when compared to competitors”.
TMG response to #2:
Thermal Energy has not sold 18 “products” over the past 18 years. What the Company has sold is 18 comprehensive advanced integrated solutions for combined energy recovery and air pollution control over the past 18 years. During this same time frame the Company has also delivered a number of Engineering Analyses to paying customers in diverse market sectors.
To put this in context consider the following:
• Over the past 18 years Thermal Energy has achieved a significant track record of developing and selling advanced technologies in innovatively engineered solutions, which have demonstrated the unique adaptability and broader application of FLU-ACE technologies to a variety of commercial and industrial clean and dirty hot gas processes, for which the heat recovery competitors listed (above) do not have an equivalent competitive offering.
• The stand-alone Engineering Analyses delivered over the past 18 years have included the automotive sector, Pulp and Paper, and a number of other industries, all of which have broadened Thermal Energy’s knowledge and experience base in developing creative and cost effective solutions for a broad spectrum of applications.
• The new President and CEO of Thermal Energy, Tim Angus, was one of the top three Johnson Controls sales executives in North America before joining Thermal Energy in February of 2005 so there is now a stronger emphasis within the organization on both sales and alliance building in aid of new business development.
• Thermal Energy has been restructured under the new management to facilitate the Engineers in accomplishing what they do best, developing and implementing exceptional technologies and customer solutions for energy recovery and air pollution control (and providing sales support as required) while dedicated sales personnel pursue new business and develop new business alliances.
It is evident from the above that Thermal Energy, while challenged regarding sales in the past, has built a strong foundation for new business development and that sales will be a top priority moving forward.
Regarding the comment that “most” of our FLU-ACE installations work; all FLU-ACE installations that were completed under the direction of Thermal Energy do work, and have achieved or surpassed Thermal Energy’s forecasted performance.
With respect to the comment that “one of the units at Ford does not work and likely never will”; Thermal Energy never had the opportunity to complete, commission, or optimize this installation because of a legal dispute with Honeywell Ltd.
In addition, it should be noted that the other two Hybrid FLU-ACE solutions at a separate Ford manufacturing facility (both of which were completed by Thermal Energy) do work as originally predicted and that Ford has stated that they were pleased with the FLU-ACE technology.
With respect to the comment that “there are other companies in the market with much better track records”; this statement is akin to comparing apples to oranges.
Thermal Energy, unlike our competitors, is not selling off the shelf products (heat recovery units, pumps, or other hardware) to someone who has already specified a part to be installed in an existing system. The whole project scope is very different for Thermal Energy.
Thermal Energy provides end-to-end comprehensive engineering and design/build services from the initial analysis to the final commissioning of a fully integrated solution that is custom tailored to the customer’s specific requirements for optimal efficiency and payback. Thermal locates heat sinks, conceptualizes and engineers the solution, sources and specs all components from HVAC hardware to full ductwork and piping distribution networks, custom builds the FLU-ACE® package, arranges licensing and transportation, manages on site construction and installation, and commissions and optimizes the installed integrated system. This is a far more comprehensive and complex deliverable than our competitor’s provide.
As to the comment that “the FLU-ACE was overpriced when compared with the competitors”; the standard or basic FLU-ACE heat recovery product for clean natural gas fired boiler flue gas applications has been slightly higher in initial cost; however, because of the higher heat recovery efficiency and effectiveness, the overall FLU-ACE installed cost per BTU (British Thermal Unit – a measurement for amount of energy gained by a pound of water when its temperature is increased by one degree Fahrenheit) of energy recovered and saved is usually less than the competition. The overall energy dollars saved by the FLU-ACE is higher by 30% to 50% than the competition, and as a result the Cost versus Savings ratio or economic payback of a FLU-ACE solution is often lower or more financially attractive than the Competition even though the Thermal Energy solutions feature the additional benefit of integrated air pollution control.
Question #3:
“It is a bit concerning when you read press releases from the Company stating that they are the only known supplier of pollution control reduction equipment with a payback through energy recovery, when only a little bit of investigation shows that there are several others that have been doing it much longer than TMG”.
TMG response to #3:
Unlike and distinct from the named heat recovery competitors, who do not claim to accomplish both energy recovery and air pollution control with their products; FLU-ACE has been tested and proven to be an air pollution control technology for removing:
• soluble Acid Gases (sulphur dioxide and other sulphur oxides [SOx] & nitrogen dioxide [NO2]),
• Particulate Matter (PM),
• Unburned Hydrocarbons (THC), and,
• a wide variety of Volatile Organic Compounds (VOC).
A potential competitor could package their heat recovery product in tandem or series with an add-on air pollution control technology and then attempt to compete with Thermal Energy in the FLU-ACE market. It is unlikely that his type of offering would be as attractive as a FLU-ACE solution to potential customers because the FLU-ACE solution offers a more efficient combined heat recovery and air pollution control capability in one highly cost effective piece of equipment.
Regarding the comment that “TMG does not know its’ competition or does not want to say”; this is untrue. As a public Company, Thermal Energy has an ongoing obligation to perform high-quality due diligence on the Company’s potential competition to facilitate sound strategic planning and to minimize any risk to shareholders.
Question #4:
“The only way they seem to sell anything is through JCI. Which is fine, however, it raises the question about why they can’t seem to sell anything directly, ie when a customer gets a couple of bids from other suppliers?”
TMG response to #4:
The fact is that Thermal Energy sold 10 FLU-ACE® solutions and a number of Engineering Analyses to customers directly during the period from 1987 to 1998 and the move to an alliance-based sales strategy came as a direct result of this first-hand experience. When compared to direct marketing; alliance sales:
• are more cost effective over all,
• put a much larger trained sales force at the Company’s disposal for lead generation,
• give the Company greater credibility in new markets, and,
• allow Thermal Energy to play in a much bigger league than would otherwise be possible.
It was simply a better business development strategy to focus the Company’s limited resources on supporting cooperative sales development efforts through alliances as the most cost effective way to grow revenues for the Company and to better position the Company for entry into the U.S. market. In fact our decision to leverage the tremendous sales resources of partners like Johnson Controls is one of the key factors in differentiating Thermal from our competitors.
Thermal Energy continues to develop new cooperative business partnerships and joint marketing relationships with other complimentary established businesses in North America and elsewhere to extend our sales reach.
Thermal is also working hard to re-introduce direct marketing again through the establishment of a new sales representative network, including our pay for performance agreement with Sinorican International for select non exclusive markets in China, a new potential sales agent relationship with a complimentary partner in Ontario as well as another potential partner in Michigan. Thermal is also now aggressively pursuing new business by meeting directly with many high profile customers. These meetings are being conducted by Tim Angus himself and are exactly in line with Thermal’s growth strategy.
Question #5:
“By the way, most pulp and paper companies who make their own pulp absolutely do have at least one boiler fired on by-product , typically bark based (hogg fuel), or sawdust, etc., and it is free, or close to it depending on your accountant”.
TMG response to #5:
This statement is untrue overall. In fact, most pulp mills are NOT lucky enough to have access to either free or lower cost waste hog fuel as a by-product of their operations.
Only the Kraft type of Bleached Pulping process or an equivalent includes built-in black liquor recovery boilers that can generate steam from combustible waste. The tree debarking operations at these sites usually only create enough fuel from their by-products to generate approximately 25% to 35% of the extra steam required by the mill during the colder months in the fall, winter, and spring seasons.
To cover this waste fuel shortfall in the cooler seasons the mills try to purchase hog fuel or sawdust but the demand exceeds the available supply so that the mills are inevitably forced to purchase higher priced fuels to make up the difference, such as Natural Gas, Fuel Oil No.6, or Coal (mainly in the U.S.).
Kraft Pulp Mills provide an excellent potential large sale application for Hybrid FLU-ACE® solutions, especially considering the fact that one FLU-ACE® installation can handle up to six separate moist process vent or flue gas heat recovery sources.
Thermal Energy has completed a number of paid Engineering Analyses for Pulp & Paper customers and has a high level of sensitivity to the needs of this market sector. Although Thermal Energy has found this market difficult to penetrate through direct marketing in the past, the Company expects that ongoing and new marketing efforts in this sector through cooperative business partners and alliances will be more successful.
It should be noted here that the majority of pulping operations are not of the Kraft type of “Bleached Pulping” process, which is discussed above, or even the more expensive “Chemical Pulp” process. Most pulping operations are of the “Ground Wood Pulping” variety, which uses a mechanical process to grind wood chips into “Newsprint Type Pulp”.
Additionally, for plants where bark and sludge by-products exist, the Thermal value of these by-products can be greatly enhanced through the utilization of drying systems, enabling these plants to reduce the quantity of purchased fuel for operations. Few drying systems exist today, but several of the existing systems available require the input of heat which in the most efficient scenarios should be recovered from somewhere in the plant. FLU-ACE® is arguably the best technology to be married to these drying systems, ultimately supplying the heat required. We are hopeful that we can successfully leverage these type systems in the future in the Pulp and Paper sector.
General Comment:
We would like to apologize for the length of time it has taken to issue this response. The past 2.5 months have been the busiest in the history of Thermal. We have been consumed with management restructuring, cleaning our balance sheet and predominantly business development activities. In addition, we felt the questions posed were excellent and warranted a well thought out and detailed response, involving our entire team. We thank you for your patience, inquisitive questions and continued support and look forward to keeping a steady communication available for you.
Yours Truly,
Tim Angus
President and CEO
E-mail: tim.angus@thermalenergy.com
36 Bentley Avenue, 2nd Floor
Ottawa, ON K2E 6T8
Tel: (613) 723-6776 ext. 207