Green Mountain Energy Draws Investor Interest in Renewable Power

The Philadelphia Inquirer
Apr. 25, 1999

With the ceremonial pull of a switch, 1,400 photovoltaic panels began turning sunlight into electrons last Thursday.

It was an event both momentous and inconsequential.

The 43-kilowatt facility on the roof of BJ's Warehouse near Conshohocken is the largest solar generator in Pennsylvania.

Yet, even on a sunny day, it won't produce enough power for the lights and refrigerators in the store itself. On this overcast morning, only four kilowatts were actually being generated.

Ninety-eight percent of Pennsylvania's electricity comes from nuclear power, coal and other fossil fuels, with most of the remainder from water power.

But if renewable energy remains years away from being a significant source of power in Pennsylvania, it is proving quite a potent marketing device for Green Mountain Energy, which is purchasing the output of the new solar facility.

The company's $33 million marketing campaign last year netted it 21,000 customers in California and 36,000 in Pennsylvania.

In California, where consumers have little monetary incentive to choose a new supplier, virtually all those who are switching have chosen Green Mountain or one of two other "green" products from traditional utilities.

In Pennsylvania, which opened its electricity market to competition in January, 29 percent of all those who switched companies chose Green Mountain's no-coal, no-nuclear power, a statistical tie with Peco Energy's low-cost Exelon brand for first place. Green Mountain's success has come even though its rates are 13 percent to 45 percent higher than their cheapest competitor here, and up to 20 percent higher than Peco's current rate.

"They are the most recognized supplier in the market, whether or not the customers are green purchasers," concluded a recent study by Xenergy, a Massachusetts energy-consulting firm.

(Wilmington's Conectiv and the nonprofit Energy Cooperative Association of Pennsylvania also are offering energy from renewable sources, but neither has done much marketing of the products.)

Green Mountain is a long way from earning a profit, having piled up $60 million in losses since it was founded two years ago.

Expanding its heavy marketing campaign to other states as they open to electricity competition would soon exhaust even the bankroll of Texas financier Sam Wyly, 64, whose family has invested $95 million to date.

So last month, the company announced it would issue a public stock offering to raise up to $600 million in additional funding.

Investors may find the company's approach compelling. While other electricity providers are appealing for customers based on low prices (Exelon) or home-town sentiment (Peco), only Green Mountain is tapping consumers' eco-guilt to brand the electrons themselves.

But Green Mountain is a mere grasshopper among the wooly mammoths of the electric industry and could be crushed by companies with greater financial backing.

In addition, the state-by-state nature of deregulation to date makes it uncertain how quickly the company will be able to expand its offerings.

Lastly, the resumes of the company's top two executives include some noteworthy business failures.

Wyly, Green Mountain's chairman, has had a roller-coaster business career that included a 1979 consent order over what the SEC called an illegal financing scheme. Forbes magazine described Wyly as "one of those go-go businessmen who at times seem to know what they're doing and at other times seem not to know at all."

As Green Mountain's CEO, Wyly chose M. David White. White, 37, is a former vice president of finance for Boston Chicken who also helped build Einstein/Noah bagels. The stocks of the two hypergrowth fast-food chains have collapsed amid allegations that they misled investors with deceptive financial statements.

Green Mountain officials said securities rules prohibited Wyly and White from answering questions about their background now, during the "quiet period" before the shares go public.

The same rules prohibit them from talking about the company's plans beyond what is stated in the tentative prospectus it filed with the SEC.

But in an interview last June in Philadelphia, Kevin Hartley, Green Mountain's hyperactive senior vice president for marketing, explained the company's strategy.

"If Ben & Jerry's, Patagonia, Saturn and Starbucks got together and started an energy brand -- that's us," said Hartley, a wooly-haired 38-year-old who favors loafers and golf shirts, and who speaks of his company's mission in almost evangelical terms.

To those examples, Hartley might now add Green Mountain's tentative prospectus outlines plans to go beyond electricity to full-fledged "G*Commerce" -- using its Web site to market everything from solar generators to co-branded credit cards, eco-tourism and "environmentally responsible" investments. It is going public as

Hartley, who earned $280,000 plus stock options last year, is no hippie altruist. With Americans spending $75 billion on electricity for their homes, he notes, "Every market-share point is worth nearly $80 million."

Green Mountain is the offspring of Green Mountain Power Corp., a Vermont utility that supplies 83,000 customers with electricity, most of it from Canadian hydropower and the Vermont Yankee nuclear plant.

In electric-choice pilot programs in Massachusetts and New Hampshire, Green Mountain won customers with mailings of spruce seedlings and an offer of "emissions-free" power. Some environmentalists were critical, noting that the source was Hydro-Quebec's huge, environmentally unfriendly, dams.

But Green Mountain Power CEO Douglas Hyde was so taken with the potential that he quit his post to start a "green" power subsidiary, Green Mountain Energy.

An investment banker connected the start-up with Dallas financier Sam Wyly, founder of Sterling Software (1998 sales: $720 million) and chairman of the Michael's Stores arts-and-crafts chain.

Along with his successes, a Business Week profile noted, Wyly's "road to riches has featured some spectacular wrecks," including a bankruptcy and a failed challenge to AT&T in the data-transmission market. In 1979, Wyly signed a consent decree settling SEC charges that he skirted bankruptcy by giving his top creditor a consulting contract that he concealed from other investors.

In Green Mountain, Wyly was convinced he had discovered the "next MCI." He and his family anted up $30 million for two-thirds of Green Mountain Energy in 1997. The Wylys increased their total stake to $90 million early this year, after buying out Green Mountain Power's shares for $1 million in December.

Seeking someone with better Wall Street ties in preparation for the public offering, Wyly eased Hyde from the CEO's post in October in favor of White, then a 37-year-old investment banker with Donaldson, Lufkin & Jenrette.

White, who attended grade school with Wyly's son, had previously done two tours of duty at Merrill Lynch. In between, he spent 21/2 years as vice president of finance for the Boston Chicken chain.

White joined Boston Chicken in December 1994, a year after its spectacular initial public offering. He helped raise several hundred million in bonds during a period in which the company grew to more than 1,000 outlets.

By 1996, however, questions were growing about the foundation for Boston Chicken's growth. A close look at the company's financial statements showed most of its income was not from royalties or food but from repayments of money it had lent its franchisees. Moreover, the company made no provision for the possibility that any of the franchisees would default.

White left Boston Chicken in June 1997, about the time the first of a series of class-action stockholder suits was filed accusing the company of accounting fraud. One complaint likened the chain's growth to that of a massive Ponzi scheme.

White also raised money for Einstein/Noah Bagel Corp., a company founded by Boston Chicken, which became the subject of shareholder suits over similar fraud allegations.

White, who said he could not comment on his tenure at Boston Chicken, was not named a defendant in either of the class actions. Settlements in both cases are pending.

Boston Chicken filed for bankruptcy protection last fall; the company's stock, which once traded at more than $40 per share, now is worth less than a dollar. Einstein/Noah, which traded above $30 in 1996, closed Friday at $1.38 a share.

Green Mountain, which owns no generation facilities, says it will not purchase power from any coal- or nuclear-fired generators.

Its Pennsylvania products come predominantly from large-scale hydropower and natural gas generators, with small percentages of renewable energy from landfill gas. Its California blends claim to be 100 percent renewable, with the promise of 25 percent "new" renewables for the most expensive blends.

"Did you know our cheapest product is our least popular?" Hartley noted in June. "Wow! Big counter-intuitive data point."

Securities analysts have been impressed by Green Mountain's strategy.

"My initial reaction was, 'Who would pay more for green power?'" said Linda Byus, an analyst with Dresdner Kleinwort Benson in Chicago. "I was wrong. The green energy idea has been far more successful than I expected."

In California last year, Green Mountain spent only $1.1 million for electricity it sold for $1.5 million, a gross margin of 28 percent.

"And we call this a low-margin business," Paul Patterson, a utility analyst with Credit Suisse First Boston, said in an interview. "That's kind of amazing they're able to get away with that."

"There is no question that Green Mountain has found a niche," said Dave Schanzer, analyst for Janney Montgomery Scott in Philadelphia. "The real question is, if they continue to have success, will someone try to acquire them?"

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