Here's the deal from H2O Applied Technologies LLC: They find ways to cut energy costs. They make energy-saving improvements. They buy and install new equipment. And they pay for everything.
This unusual business model is attracting a growing list of clients for H2O, a privately held Boston firm that makes its money by taking a cut - typically 80 percent - of the savings generated by its work. Since adopting this model two years ago, company officials said, the firm's annual revenues have tripled, and its clients, primarily hospitals and universities, now stretch from Maine to Miami.
The appeal to customers is obvious, particularly at hospitals and universities where capital budgets that finance expensive projects are tight. At Brigham and Women's Hospital, for example, vice president of support services Art Mombourquette said upgrades to heating, cooling, and other mechanical systems often lose out to projects like building and equipping operating rooms.
But H2O, which recently signed a five-year contract with Brigham, will allow the hospital to modernize its equipment and systems without tying up scarce capital, Mombourquette said. Brigham estimates that H2O's improvements will generate about $750,000 a year in total energy and utility savings.
"A lot companies are willing to come in and evaluate and identify upgrade needs, but you have to buy everything yourself," Mombourquette said. "H2O brings its own funding. They put their own money where their mouth is."
As Mombourquette suggested, H2O's financing makes it different from other energy efficiency consultants. Many firms get paid by taking a share of the savings their recommendations generate, but the clients have to pay for the recommended construction and equipment themselves.
H2O, however, foots the bill. At the end of the contract, usually five or six years, the client has the option to buy back the equipment from H2O at deeply discounted rates, typically 6 to 8 cents on the dollar.
E. Sarah Slaughter, a professor at MIT's Sloan School of Management, called H2O's approach a "powerful model," particularly for the nonprofit sector.
"Being able to have somebody else buy the equipment is a big benefit," she said. "It is really a potential growth opportunity."
Hope Sidman, H2O's vice chairman and chief operating officer, said her company developed the model out of necessity. The firm, which grew from the real estate development firm Beacon Cos. about a decade ago, had operated like other energy consultants, devising savings programs but leaving it to their primarily nonprofit clients to finance them.
But a few years ago, H2O's business started to slip. Facility managers told H2O they wanted to invest in energy-saving projects, but couldn't squeeze money from capital budgets. So, H2O decided to finance the projects itself, working with accountants and lawyers for about a year to devise a model to generate profits for the firm and savings for clients. This model, which uses an accounting method known as "off-balance sheet," frees clients' capital and borrowing capacity for other projects.
Now, with energy costs soaring, H2O's business is booming and the firm is looking to take its model west. Next stop: California.
"Everyone is going green," said Sidman. "We saw a need in the marketplace, and that positioned us to ride this wave."
H2O, which employs about 20, began as a unit of Beacon Cos., the development firm of Sidman's grandfather, Norman Leventhal, and late father, Edwin. Beacon initially formed the unit to save water in buildings it owned, then acquired another water saving company and set up H2O as a separate firm. The Sidman family became the sole owners of the company in 2003.
While H2O boasts an innovative business model, its approach to energy conservation is hardly cutting-edge. It employs technologies such as light bulbs, steam traps, and thermostats. Big-ticket items, such as heating and cooling systems, come off the shelf.
"It's just meat and potatoes energy conservation," said Sidman. "We like being boring."
But boring works. At St. Elizabeth's Medical Center in Brighton, one of the first to use H2O's save now, pay later model, officials estimate they've cut total energy and utility costs by at least $500,000 a year.
More than half the savings come from changing lights - about 10,000 of them in buildings and garages - to more efficient fluorescent bulbs. Temperature gauges to regulate the flow of water used in high-temperature autoclaves that sterilize medical and surgical equipment are saving about $30,000 a year in water and electricity costs. A new filtration system eliminates impurities from water recirculating through the heating and air conditioning system, improving efficiency and cutting water and electricity costs by more than $20,000 a year.
All told, H2O has invested more than $1 million at St. Elizabeth's, part of the struggling Caritas Christi Health Care system owned by the Catholic Archdiocese of Boston. With finances so tight, said Paul Crawford, director of engineering and maintenance, it's unlikely he could have squeezed the money from the hospital's capital budget. "That's an enormous nut to crack," Crawford said. He added the savings realized from these investments means more money to support the hospital's clinical services.
Even the wealthiest institutions have limited capital, Sidman said, and they, too, are feeling the squeeze of rising energy costs. H2O allows them to cut energy spending while preserving capital for other investments.
"It's really a win-win," she said. "We think its the right model at the right time."
Robert Gavin can be reached at rgavin@globe.com.
