October 28, 2002

Emerging Technology Market Highlighted at the EnerTech
Capital Forum

By Jon T. Brock
Senior Director, Energy-IT/Strategic Intelligence

[UtiliPoint International exclusive] I recently had the good fortune to attend the fourth annual EnerTech Capital Forum at the historic Arizona Biltmore Resort and Spa in Phoenix, Arizona. Per EnerTech Capital, the forum is intended to provoke thoughtful discussion of the dynamic factors impacting private equity investing in the energy and telecommunications sectors.

Analysis: EnerTech Capital hosts this annual event for their limited partners, industry leaders, private equity professionals, consultants and entrepreneurs representing the energy and telecommunications companies.

EnerTech Capital describes itself as one of the nation’s largest and leading venture firms specializing in investment opportunities emerging from the reshaping and convergence of the energy, utility and telecommunications industries. Founded in August of 1996, it manages three investment funds totaling over $300 million of capital and has invested in 33 service and technology companies related to EnerTech Capital’s unique focus. Through an extensive network of strategic partners and industry professionals, it provides extensive investment experience and deep domain expertise to help ensure the success of its investments in energy and telecommunications technologies, infrastructure, software and services. Based in suburban Philadelphia, it employs nine full-time investment professionals.

The event was sponsored by Accenture and the executive search offices of Hobbs & Towne. Co-sponsors included the banking practice of Comerica, customer care and billing outsourcer Orcom, the law firm of Schulte Roth & Zabel LLP, and the multi-practice law firm of Pepper Hamilton, LLP.

For those of us in attendance who are not limited partners in the EnerTech funds, the forum began with opening remarks from managing director David Lincoln. Lincoln, with more than 20 years experience in investments and the energy industry, and degrees from Colgate and the University of Pennsylvania, reminded the audience that although we are experiencing difficult financial times in the United States, opportunities still do exist in this space. He introduced Paul Daugherty, managing partner at Accenture.

Investment in Energy and IT

Daugherty presented Accenture research that seemed to indicate a correlation between IT spending and “value creation,” value creation being defined as earnings. Apparently, organizations whose IT departments spend approximately 45 percent of their total IT budget on building new capability have better earnings than those whose IT departments spend 25 percent of their total IT budget on building new capability. The key message here is that the forward thinkers are spending more on new development as opposed to maintenance, and therefore have higher earnings. I did approach Daugherty after his presentation to ask about the energy “anomalies” we have seen recently. Take for instance, Duke or AEP, definite trail-blazers and respected energy leaders in the industry. Yet, when a few rogue traders head south, the market caps and resulting earnings head south also. Daugherty assured me that the “anomalies” had been removed from the research.

Mark Heesen, President of the National Venture Capital Association, next presented on the state of venture capital in this constrained market. As one can imagine, it is not as pretty as it used to be. Heesen presented evidence that venture funding is down, acquisitions are up, but dollars as a result of those acquisitions are decreasing. This means that there are a lot of “fire sales” occurring at the moment.

Heesen did remind us that venture-funded start-ups such as Starbucks Coffee began in similar capital-constrained markets. He also presented survey evidence that energy has not suffered like other industries in the venture capital markets, and that a rebound, albeit slight, has appeared to be forthcoming.

Telecom Still an Opportunity?

Bill Kingsley, also a managing director at EnerTech Capital moderated a session on the optimization software and new business models for the telecom sectors. Is that right? Telecom sector? I thought that telecom was dead. The CEO of both Arbinet-thexchange and Schema, Ltd. quickly changed my mind. There are still decent opportunities for investment in this sector.

Arbinet-thexchange is a full-service trading solution for buyers and sellers of voice minutes. According to Arbinet, thexchange has created the spot market and designed and built the world’s most advanced system to automate anonymous minutes trading between telecom companies. The world’s leading telecom carriers use this system to perform dynamic least cost routing via the spot market to reduce their cost of service and expand revenues by reaching new markets without extensive network build out. And based on their year over year growth, approximately 500 percent, I was quite impressed.

According to Schema, Ltd., it was founded in 1995 as a pioneer in the development of complete optimization and planning solutions. Its mission since 1998 has been helping wireless carriers realize dramatic, network-wide improvements in resource and capital efficiency.

By helping wireless carriers achieve unparalleled system-wide performance through the automated fine-tuning of vital network parameters, Schema ensures that its customers leverage existing and future resources in the most advantageous manner throughout the migration to new standards.

Schema’s solutions have been deployed and benchmarked by leading wireless operators worldwide, including Verizon Wireless, Cingular Wireless, U.S. Cellular, BellSouth International, Cellcom Greenbay, and Pelephone Israel.

Energy Management

Lynn Fryer of E-Source/Platts moderated a session on the energy management value-chain. Executives from Sixth Dimension, Enerwise Global Technologies, CW Industries, and Connected Energy presented from the panel. This panel was fascinating to me, as I have done research on this very segment of the industry. As many of the presentations confirmed, there are definitely consolidation opportunities available in this space. Some of that consolidation has already happened, as evidenced by Enerwise’s acquisition of American Electric Power’s (AEP’s) DataPult.

I am also quite impressed with Sixth Dimension, a company that optimizes energy assets via what I like to call a version of enterprise application integration (EAI). However, Sixth Dimension does not integrate applications. Instead, they “integrate” assets.

According to the CEO of Connected Energy, there is activity today with OEMs (via warranties, guarantees, and reliability clauses in contracts), governments (via distributed generation experimentation), and service companies such as Sempra Energy.

PLC awaiting a “break-out?”

After a luncheon speech by John Shadegg, R-4th congressional district in Arizona, the afternoon sessions concluded with subjects on powerline carrier, early stage investing strategies, and distributed generation updates, the most interesting to this analyst being the powerline carrier session.

Peter Kastner of Aberdeen Group moderated over a panel of executives from Current Technologies, Conectiv Power and Delivery, and Anila Fund. Most interesting was the effort of Current Technologies.

I seem to recall an effort years ago to use the distribution network as a high-speed Internet medium. Utilities had visions of knocking off the Internet service providers (ISPs) and becoming the next AOL. The technology was too early for commercialization however, and PLC got a bad rap as a result. Instead, we are now witnessing a “rebirth” of sorts of PLC, not to be the next Internet medium, but to simply read the meters. The next step may be to play as an Internet medium, but meter reading provides a nice niche as a starting point.

Current Communications Group recently obtained $10 million in financing. EnerTech Capital and Liberty Associated Partners, a founding investor of Current Communications, led the investment. Current develops high-speed data, voice, video, and other communications through PLC technology.

Pennsylvania utilities as well as others in the Northeast (Conectiv and PEPCO included) have recently embraced PLC as a means of automating their meter reading. We could well be witnessing a re-birth of PLC, which would bode well for investors like EnerTech.

All in all it was quite a day in Phoenix. My hat is off to EnerTech Capital for putting quite a bit of management talent in front of us. They demonstrated that there still are investment opportunities in the energy and telecommunications space today.

We encourage our readers to contact us with their comments. We look forward to hearing from you. Nancy Spring

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UtiliPoint’s IssueAlert(SM) is compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint’s IssueAlert are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint’s sole purpose in publishing its IssueAlert is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues.

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