Green Power Next for Huge IPO

Financier Sam Wyly aims to take public.
Investors and potential customers better read the fine print.

By Mark Gimein
The Industry Standard
April 26th, 1999

Fred Lefever is an 87-year-old retired schoolteacher living in Sutter Creek, a small town in Northern California. Lefever reads Mother Jones and is on the mailing list for the consumer-watchdog group Public Citizen. His long-distance service comes from Working Assets, the socially progressive telephone company.

Sam Wyly is a Dallas multimillionaire who runs a software company, a big retail chain and an insurance company. He made his first big fortune in the mining and oil-refining business. Wyly is a longtime contributor to Texas Republican senator and former presidential candidate Phil Gramm. He's also given money to the campaigns of House Majority Leader Dick Armey, who once described his plans for the Environmental Protection Agency as "[putting] a snaffle bit on it and [riding] that pony down."

However, Fred Lefever and Sam Wyly do have one thing in common:, known until recently as Green Mountain Energy. It's the company from which Lefever buys "green" power, which is renewable and environmentally safe. It's also the company that may soon make Sam Wyly the Net's next billionaire.

At the end of March, Green Mountain Energy, a company formed to sell residential electricity in the rapidly deregulating utility market, changed its name to and filed with the Securities and Exchange Commission for a proposed stock offering which would be the biggest Net IPO yet. Most Net IPOs have raised less than $100 million;'s plan to offer as much as $600 million in stock dwarfs everything that has come before. While the numbers in's preliminary prospectus are not binding, and the company hasn't yet indicated what percentage of its stock will be sold, it's likely that the company's bankers are expecting a total market value of $3 billion or more. That would make for an impressive debut by a company that has about 72,000 customers in two states and that reported a loss of $46 million in 1998 on revenues of $1.5 million.

For a number of years, power companies have expected utility deregulation to open up an opportunity comparable to telephone deregulation, laying the groundwork for the creation of companies on the order of MCI and Sprint. That's finally happening. In three states – California, Pennsylvania and Massachusetts – new providers have gained the right to sell power to consumers in competition with local utilities. They use the dominant local provider's transmission lines – just as long-distance phone companies work with local telephone companies – but resell power from sources far away on the North American power grid. Upstarts that undercut the price of the local power company – which is harder than it sounds because of the complex economics of deregulation – might stand to make a killing. Some companies, among them, offer the added incentive of green power. combines a nifty ecobrand and a huge market with the can't-fail proposition of Internet marketing.

Sounds good. But scratch beneath the surface, and you find a company loaded with surprises for customers and investors alike. may be not only the biggest IPO coming down the pike, but also a poster child for the extraordinary excesses of the Net economy.

The surprises for investors in start with Sam Wyly himself. He's chairman of the board of both Sterling Software and Michaels Stores, a chain of arts and crafts outlets. His brother, Charles Wyly, serves as vice chairman of Michaels; until recently, he was also the vice chairman of Sterling Software. His son, Evan, manages a Dallas hedge fund called Maverick Capital and sits on the board of both companies (see chart). Over the years, a number of Wyly's businesses – Sterling Software and Sterling Commerce, a Sterling Software spinoff devoted to Net commerce – have been big successes. A few others, like Frost Brothers, an ultrapricey department-store chain that went out of business, have been high-profile failures.

Success or failure aside, the most remarkable aspect of Sam Wyly's ventures may be the extraordinary compensation packages he takes home. Even in the upper echelons of American business, few people have the luxury of deciding how big their own paychecks should be, but Sam Wyly is one of the lucky few. In 1997, he got a compensation package the Dallas Morning News calculated at $31.4 million in cash and Sterling Software options.

Wyly's payout was determined by the company's executive committee and two option committees. The executive committee of Sterling Software was composed of Sam Wyly, his brother Charles and CEO Sterling Williams. A total of five people sat on the two option committees; three of them, again, were Sterling Williams and Sam and Charles Wyly. Charles Wyly, too, was well remunerated for his services to Sterling Software. In 1997, his package was worth $25.4 million.

In 1998, the Wylys didn't get stock options from Sterling Software. But they're in no danger of starving. Remember, Sam Wyly is also chairman of Michaels Stores, which had revenues of $1.6 billion in the fiscal year ended January 1999. Calpers, the huge and influential California Public Employees' Retirement Fund, last year put Michaels on its list of the companies with the worst management.

"The board of Michaels Stores is dominated by the interests of the Wyly family, rather than shareholders' interests," says Calpers spokesman Brad Pacheco. "The makeup of the compensation committee has led to generous golden parachutes and repricing of stock options."

To be specific, the executive and compensation committees of Michaels Stores both have two members – Sam and Charles Wyly. The brothers treat themselves well: In the fiscal year ended January 1998, Sam Wyly received $11.7 million in salary and options from Michaels, while his brother was paid half that.

So how did Texan Sam Wyly wind up as chairman of a "" power company based in Vermont? started as a project of Green Mountain Power, a Vermont electric utility that had hoped to expand into what was expected to be a huge, competitive market for electricity. GMP formed a subsidiary, Green Mountain Energy Resources, to sell power to consumers in deregulated markets.

The new entity got both its name and its slogan, "Choose Wisely, It's a Small Planet," from GMP. The plan was that that the South Burlington, Vt.-based startup would be a socially and environmentally conscious utility in the mold of Working Assets, the telephone company, and Ben & Jerry's, the Vermont ice-cream maker with impeccable counterculture credentials. But there's one thing that the company's publicity materials didn't emphasize: GMP owns 18 percent of the Vermont Yankee nuclear power plant.

The problem for the small, struggling utility was that it could never make a major national marketing play on its own. For that reason, GMP in mid-1997 started looking for investors. In August 1997, Wyly and his associates, including the Maverick Fund, committed to investing $30 million for 67 percent of the company. That same month, the CEO of GMP, Douglas Hyde, left his post to become CEO of Green Mountain Energy.

But Hyde didn't last in his new role. By October 1998, he was out. Hyde won't talk about or the circumstances of his departure. As for Sam Wyly? Hyde says, "That's the subject I least want to talk about."

Hyde's replacement as CEO wasn't another utility executive. Instead, it was an investment banker, David White, from Donaldson Lufkin & Jenrette in New York. Ironically, White's main experience outside investment banking was a two-and-a-half-year stint as VP of finance for Boston Chicken, a much-hyped company that turned into one of the most spectacular stock market flameouts of the 1990s. Last October, the restaurant chain filed for Chapter 11 bankruptcy protection.

Meanwhile, Wyly and his investor group steadily upped their stake in Green Mountain Energy. By the end of 1998, with an investment of an additional $30 million, funds controlled by the Wyly family owned 99 percent of the company. Finally, in January, Green Mountain Power, the utility that had originally launched the project, gave up its remaining stake for $1 million. Almost immediately thereafter, in late January, Sam Wyly announced plans to take the company public. The name was changed to, and voila: By the end of March, Wyly was heading up a company that could be billed as a huge Net play.

But what was happening to Green Mountain's business during all that financial maneuvering?

Just ask Fred Lefever. Last June, when he got Green Mountain Energy's sales pitch in the mail, he rushed to sign up. Now he's waiting for his one-year service agreement to end so he doesn't have to pay a $20 penalty to cancel. Last October, Lefever learned of Public Citizen's warning that Green Mountain Energy's California "green" energy program might actually increase pollution.

Public Citizen charged that while Green Mountain bought – and resold to consumers – hydropower from PacifiCorp, a large Oregon utility, PacifiCorp would need to draw more power from its coal-fired power plants to fill the demands of its other customers. Public Citizen charged the result was more, not less, pollution.

What's most interesting about the brouhaha over PacifiCorp, however, isn't the question of whether PacifiCorp power was genuinely green. Regardless of its merits, power from PacifiCorp is not eligible for the green electricity subsidy from the state of California. The subsidy is only available for power that is generated in-state by producers who aren't traditional utilities. Because of a complex tax structure designed to give incumbent utilities a cushion during the transition to deregulation, without that subsidy – which amounts to about a penny and a half per kilowatt hour – alternative power providers can't compete.

( did successfully lobby the California state legislature for six months of retroactive subsidies for the PacifiCorp power. In Pennsylvania, the other state where competes, the company's power comes from large hydroelectric plants.)

Oversights like that – failing to realize the company's ineligibility for a subsidy – should make both investors and consumers skeptical. You can add a ".com" to the name, but in the end, the value the Web brings to your business in customer service and distribution comes down to execution. To see if really has its Net chops, try going to its site and signing up to switch electric providers.

Right after signing up, you'll get an e-mail promising a phone call from the company within two days.

Don't count on it. Eighteen days after signing up for the service, having gotten nothing by phone or mail, The Standard called's hotline to make sure that the order had been received.

The sign-up center had no record of the order. Neither did the customer-service center. The Standard finally reached a rep named Beverly, who had some advice. "We've had some trouble with Web sign-ups," she says. "Try waiting about three weeks. When you sign up on the Web, it has to go through our enrollment system, then it has to go through a system in Denver, then it comes back to us. If you don't hear anything in a few weeks, we can sign you up on the phone."

Last year, by the way, Greenmountain. com paid $1.2 million to Sterling Software for technology consulting. Go figure.

All in the Family

The Wyly family controls a number of major companies. The same faces appear on many of the corporate boards, and a good number of them are Wylys. Below is the composition of the boards of directors of the Wyly-controlled companies. Family members are listed first; others who sit on multiple boards of Wyly companies follow. The Wyly family also runs a major hedge fund, Maverick Capital.

Sterling Software 1998 Revenue: $719.9 million

Sterling Commerce 1998 Revenue: $490.3 million

Michaels Stores 1999 Revenue: $1.6 billion

Scottish Annuity & Life 1998 Revenue: $1.4 million 1998 Revenue: $1.4 million

Power Play

Sam Wyly isn't the only financial titan trying to cash in on the high-octane mix of utility deregulation and the Net.

In January, The Standard reported on the financing strategies of iParty, a party-goods company set up by New York investor Robert Lessin, Sam Belzberg (a Canadian financier best known as a 1980s corporate greenmailer) and Byron Hero (a one-time corporate raider).

The strange thing about iParty was how it went public: Before launching, it merged with a "public shell," an already public company with no operations that was controlled by Belzberg.

Turns out, Lessin and Belzberg used the same method to create public stock for a California company called Wattage Monitor, which provides electric-power information over the Web. Almost immediately, Lessin and CEO Gerald Alderson filed with the SEC to register their shares in the new company, which lets them sell their shares at will. Alderson's explanation? It was done so that one person – Belzberg – couldn't control all the stock in public hands and dribble it out onto the market at an artificially inflated price. It's worth remembering that Belzberg was once involved in a serious securities scandal related to his failed bid to acquire Ashland Oil; he later lost much of his fortune when his holding company, First City Financial, went bust in the wake of the savings and loan industry collapse.

Wattage Monitor, which provides not power, but information about the deregulating electric business, now has a market capitalization of about $100 million. It's either a telltale sign of the potential investors see in the multibillion-dollar electric business – or just one more sign of the continued enthusiasm on the Street for all things Internet.

– M.G.

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