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Executive Summary A-1 Energy Company - Electricity Reseller/Utility. USA.Background Information: Beginning in the late 1990s a handful of States throughout the US began the process of deregulating their electric markets. Today, half of the states in the country have adopted electric deregulation and are in various stages of implementation. States with a substantial number of customers currently receiving electricity in a deregulated environment include Texas, New York, New Jersey, Michigan, Ohio, Illinois and Virginia. In deregulated markets, the supply chain responsible for the delivery of electricity to customers is composed of 3 tiers: (1) Generation (2) Distribution (3) Retailing Generators create and supply electric power to the deregulated market. Transmission and distribution of that power is provided by the still-regulated utility. The retail provider – A-1 Energy’s role – has two primary areas of responsibility:
(1) Obtaining and scheduling supply on behalf of its customers (2) Providing service and billing to its customers.
Company: A-1 Energy is located in Texas. A-1 Energy has a agreement to have a utility license to provide power in Texas. The company will provide retail electric power to commercial end-user customers in Texas with expansion plans into newly deregulated states. On April 1, 2006, A-1 Energy plans to receive a license to provide power in New York State. A-1 Energy re-seller plans to operate in all newly unregulated markets. Corporate Structure: The A-1 Energy is structured in such a way that business is conducted in a given state through wholly owned subsidiaries of the parent corporation, A-1 ENERGY. In Texas, business is done through wholly owned subsidiary, A-1 Energy US Power Company. The New York Corporation will be set up as A-1 Energy USA or basically in the same manner.
Operating History: A-1 Energy was founded in August 2005. In order to expedite its entry into the Texas market, A-1 Energy has arranged to utilize a license from a company already certified and licensed as an REP by the Texas Public Utilities Commission. The CEO Andrew Marriner has several years experience operating a power reseller business. See Resume. Many hours in time and money has been invested to position the company to take advantage of this high scale opportunity.
A-1 Energy will be serving commercial customers in the Texas market immediately when funded. Currently, the company has a broker network (similar to the real estate industry) standing by to provide 50-80 Commercial and Industrial customers at about 250 sites with a combined load of roughly 10,000,000 kwh per month. The Texas market would generate approximately $1,500,000 in monthly billings after the first year. It is possible to build to $800,000-$2,000,000 in monthly revenue in a short period of time and generate 7-8% in monthly gross net profit before tax once the revenue stream is at breakeven. Market Opportunity: Nationwide, the deregulated electric market is approximately, 1.1 Trillion Kilowatt-hours and $72 billion annually. In eight states in which the A-1 Energy is active or likely to become active in the next 24 months, the market is approximately 764 Billion Kilowatt-hours and $50 billion annually. Those amounts and the states to which they are attributable can be found in Appendix I. It should be noted that A-1 Energy’s initial focus is to approach mid-size to large commercial and industrial customers, which represent approximately two-thirds of the total market as described in the previous paragraph. The balance of the market is comprised of residential and smaller commercial customers that A-1 Energy could eventually choose to serve as well. Referring to Appendix I, a $30 - $50 million financing would enable the A-1 Energy to purchase $150 - $250 million USD in power annually. For New York and Texas, markets the company plans to open, this annual base would represent an estimated combined market share of just 1.5% per annum. One of the strengths of the retail energy business is the number and size of the business opportunities that exist in the market. The opportunities exist because even in the most advanced deregulated markets, fewer than 40-50% of the customers in the market have switched to competitive retail providers. The balance or 50-60% of the customers get their power from the incumbents. Put another way, sales do not and would not represent an obstacle to growth for the A-1 Energy. Currently, resellers only represent approximately 15-25% of the market share of all the major electricity players in the US. Competitive Edge:
a) Customer Service Focus The retail electric business is fundamentally a service business. Electricity Re-sellers compete with one another by offering customers competitive prices and quality service. In the early stages of deregulation many Electricity Resellers, incorrectly believing the customer would care only about the price of energy, made business decisions based only on the issue of price. This has led to a high level of customer dissatisfaction with the service that they receive from their REP, as most REPs are not equipped to offer customers the level of service received in other unregulated service businesses. A-1 Energy’s competitive advantage lies in its ability to utilize the technology services expertise of its founders and employees to provide its customers with competitive prices and quality service in a scalable and efficient manner. As the markets have matured, it has become apparent that this is a substantial advantage. The service that customers have received from their regulated utilities has been notoriously bad for decades. In deregulated markets, the retail arm of the incumbent utility (usually spun-off as a separate company) is typically encumbered by legacy customer management and billing systems. New companies, with executives coming primarily from the energy business eager to focus on sales, often outsource customer care and billing efforts, thereby distancing themselves from important elements of their core businesses. US Energy has built its business around IT systems that allow it to efficiently provide the most flexible and customer-friendly billing services offered by any REP in the country today. The services that those systems allow A-1 Energy to offer to its customers will support A-1 Energy’s growth in the Texas market and position A-1 Energy to launch in the New York market with nearly 500,000,000 kWh of annual business in one year. b) Competitive Cost Structure. A-1 Energy has low overhead for two primary reasons: A-1 Energy’s business model does not require infrastructure to support complex hedging strategies: Traditional re-sellers purchase electricity in the commodities market and then attempt to sell that electricity to consumers at a profit. Under this type of business model, re-sellers are dependant upon complex hedging strategies, which can wipe out years of profits when markets move in the wrong direction as we have witnessed with companies like Texas Commercial Energy. The A-1model eliminates the need for complex hedging strategies and the associated risk by using "back-to-back" contracts whereby the energy is purchased only after a credit worthy end-user customer has entered into a retail purchase agreement. A-1 Energy’s model does not rely upon a large sales force: Unlike many other industries, the distribution channel for electrical markets is non-exclusive. That is, A-1could choose to rely entirely on brokers, not at all on brokers, or choose any point in between. Most brokers derive revenue by taking pricing (in kWh) provided to them by A-1and marking that price up to their customer. The broker delivers A-1’s contract executed by the customers, and A-1 pays the broker its mark-up across the life of the contract. The existence of a strong broker channel in the industry is another element of A-1 Energy’s business that makes its business efficient and highly scalable. In addition, focus on reliable services drives additional business through that broker network. Many brokers have struggled with customer dissatisfaction because of poor REP services. When brokers get positive feedback from customers regarding the focus on good service, they are more likely to direct a higher percentage of their customers to A-1 Energy. Management: Andrew Marriner. Developed a business model and expanded the operation of a start-up electric reseller company within the deregulated retail electricity industry. Involved in all areas of the business. The company obtained $9.5 million in gross revenue during its first year in business. Mr. Marriner has a support staff of key management experienced in the industry to help with expansion. With experienced management, improving service and value to the customer, and a good billing process, A-1 Energy will build a firm that will quickly and successfully compete with both new and established electricity resellers in deregulated markets across the United States.
Projected Earnings: Assuming $30 million in equity financing, and 100% reinvested in profits, the Reseller anticipates to generate a total of $100,000,000.00 in revenues, and after the cost of funds $5,000,000 in net income the first year. Based upon a price-to-earnings multiple of 10, at the end of year five, the Energy Re-seller could have a sizable market value. A detailed projection of earnings can be provided for 1-2 years on request. A quick projection could be shown on what A-1 Energy could earn over the next 5 years if it secured $30 to $55 million in funding from an investor. A-1 can list all assumptions including the cost of interest, the cost of the insurance guarantee, and other items in the analysis. All profits earned for each year are reinvested in the business (I.e. cash will be used to collateralized additional contracts.] Refer to Appendix I for the projected revenues stream. Business Risk Analysis: All resellers primarily face three specific business risks
A-1 Energy believes it has mitigated this risk by employing a “matched-contract” strategy. All terms and conditions of the wholesale and retail energy contract are substantially the same.
A-1 Energy believes it has mitigated this risk by dealing with credit-worthy corporate (not individuals) clients that have minimum requirements of $1million in gross billings per year. Where necessary, A-1 Energy will purchase credit protection from a third-party to guarantee payments on certain contracts.
· Supplier Performance risk – Defined as the risk that the electricity reseller is unable to deliver product under terms and conditions as set out in the wholesale purchase agreement.
· A-1 Energy will provide Receivable Guarantee Insurance to resolve any risk from the customer’s non-performance. Financing Request:
At the prompting of existing industry players, when the Federal government allowed the States to deregulate their electricity markets, barriers to entry were created to deter new market players from entering the industry. The most significant barrier has been the requirement that all energy re-sellers (new to the market) place a deposit in escrow with the relevant State Energy commission. The deposit is equal to 20% of the monetary value of the power purchased from the wholesaler. For example, if an energy re-seller entered into a contract to purchase $100 million USD of power from a wholesaler over the course of one (1) year, the State Commission in each State requires a 20% deposit or a 2-month cash deposit or 3 months in a LOC of the monthly revenue usage of the total placed by the re-seller to collateralize the contract.
To allow it to meet the regulatory hurdle, A-1 Energy currently seeks $10 to $25 million USD that will be used for the following purposes: · $2 million for working capital · $8 - $25 million to enable A-1 to place deposits to purchase $100 to $250 million USD annually in electricity, as customers are secured. A-1 Energy will consider all forms of financing including senior debt, convertible debt, or equity proposals. Conclusion: In past years the incumbent energy companies have had a monopoly while being under the watchful eye of the public agencies. Once deregulation in the late 90’s was passed, private companies have been allowed to enter the market. However, the incumbent energy operators were able to require major barriers that still exist to keep most of the competition back by initiating the deposit method or requirement that exists. Only the companies who create the ability to place the deposits with major funds behind them will be successful. A-1 Energy is in position. There are many reasons to enter the market, to many to list. Here are a few of the top reasons worth mentioning.
The energy business is all about providing service. Receiving customer satisfaction. The upside potential is enormous. The difference between the power service business and other service businesses is the customer is ready and willing to change due to historically bad experiences in the past. Also compared to regular service businesses, the collection method for services is much different. Being a utility A-1 can immediately turn off the electricity of the customer for non-payment. The fact that A-1 has improvised in its contract agreement the ability to EFT the payment each month makes the need for a deposit non existent, but has to comply with the state in any case. Except for initial working capital, the funding requirement is primarily needed as deposits to secure potential customers to expand the business. The funds are not ever touched, and are not needed to purchase major equipment. This is a very unique and exciting ‘high growth’ opportunity. Review the attached information.
Please contact James Whitsitt. 214-321-9044 / james.whitsitt@globalequipmentandfinance.com for more information. APPENDIX I ENERGY RESELLER ADDRESSABLE MARKET SIZE Note that between states, the ratio between kWh and market size expressed in dollars varies due to the different prices for electricity in the different states.
Appendix 11
DETAILED BUSINESS RISK ANALYSIS
A-1 Energy is primarily exposed to the following two adverse events. A discussion of the impact of these events follows:
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