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Electricity Shortage Powers Keith Cos. to Record Earnings

February 16, 2001|E. SCOTT RECKARD | TIMES STAFF WRITER

The energy crisis threatening to spread from California to other states is proving a boon for engineering firms, from behemoths to little guys like Keith Cos. Inc., that can design and build power plants.

The Costa Mesa company, which has carved out a niche building smaller local plants quickly, on Thursday reported record annual and fourth-quarter revenue and profit, befitting a stock that has more than doubled in value in the last two months.

"It's a booming industry right now," company Chairman Aram Keith said. "Everyone's looking to increase electricity."

With Keith Cos. shares leading the way, engineering company stocks have jumped as investors dump new economy enterprises for businesses with solid profits and backlogs of orders.

In the past two months, shares of Fluor Corp. in Aliso Viejo and Jacobs Engineering Group Inc. in Pasadena have surged by a third.

The engineering and technical services arena is awash in work these days, with government spending on roads, airports and other infrastructure helping companies such as Jacobs add to their traditional work for heavy industry. Fluor Corp. has major power plant construction and environmental cleanup work worldwide.

What sets Keith apart is its expertise in several growing businesses such as golf retirement communities and fiber-optic communications. But the big attention-getter is its work on local natural-gas power plants that generate electricity when it's most needed--during peak periods when blackouts loom.

Keith's Engineering Services Inc. unit has designed five so-called peaker plants for PG&E National Energy Co., three in Ohio and one each in Chula Vista and Escondido. From the planning board to operations can take less than a year compared with three years or more for a major plant.

ESI also engineers smaller-scale power systems for companies and universities, and is discussing with the Irvine Co. the possibility of installing large generating plants that could power entire planned communities and sell excess power.

It is designing second peaker plants for each of the three Ohio sites and will probably do the same in Chula Vista and Escondido, ESI President Terry Herringshaw said. He expects ESI revenue, about $5 million last year, to grow 10% to 15% annually this year and next.

"It looks like until at least 2003, there's going to be a capacity shortfall, so we're going to see work all the way up the coast, from California to Washington," Herringshaw said. "And there are the same needs back East. No one was investing in the utility systems, and we're all suffering the consequences."

As governments, businesses and households look for the quickest fix, the plants Keith designs have an easier time winning operating permits because they are smaller, quieter and aren't fueled by coal or oil but by cleaner-burning gas.

They produce up to 50 megawatts, enough for 50,000 households, compared with the 500-megawatt plants typically built by a joint venture between Fluor and Duke Energy Corp.

Built in the regions that need them, the small plants help compensate for power shortfalls from large plants located far away and the long, inadequate transmission lines carrying their power, advocates say.

Observers believe state and federal regulators are likely to put construction of new peaker plants on a fast track, which helps explain the company's stock performance in the last few months.

Keith started 18 years ago in the home-building industry, and residential work accounts for half its business. Through acquisitions and internal growth, it hopes to build its other divisions--telecommunications, highway and water works, and industrial and energy.

Keith Cos. went public at $9 a share in July 1999, but tumbled into the $4 range later that year, as Internet stocks took center stage. After languishing for much of 2000, it began to recover last fall. Then between Dec. 21 and Tuesday it jumped from $7.25 to $22.44 in Nasdaq trading.

Even after slipping back to $17.75 over the last two days, it was still up almost 250% over the last two months, compared with old giants like Fluor and Jacobs, which have risen about a third. Trading volume, about 10,000 shares a day last fall, has been in the 300,000-to-400,000 range recently.

"It's a unique way for investors to play the power supply crisis," said Gary Holdsworth, an analyst at Wedbush Morgan Securities, which took Keith public. "The idea is to get power away from these big plants that nobody can afford to build anymore and get it down to where people need it and use it."

He also likes Capstone Turbine Corp. in Chatsworth, which builds small generators using jet engine and automotive turbocharger technology.

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