full report: smart grid: strategic partnerships and m&a · full report: smart grid: strategic...

AGRION LLC | 303 Fifth Avenue, Suite 1105 | New York, NY 10016 | Tel: +1 212.725.2530 | www.agrion.org

FULL REPORT: Smart Grid: Strategic Partnerships and M&A

Page | 1

Speakers: ABB, Gary Rackliffe, Vice President of Smart Grid Development Bank of America Merrill Lynch, Riaz Ladhabhoy, Director of Cleantech Investment Banking EnerNOC, Jeff Renaud, Director of Corporate Development IBM, Mozhi Habibi, Strategy Manager Global Energy and Utilities Strategies and Solutions Schneider Electric, Scott Henneberry, Vice President of Smart Grid Strategy Verizon, Rilck G. Noel, Vice President of Global Energy and Utilities

TABLE OF CONTENTS

Introduction 2

Selecting Strategic Partners 3

Key Motivators for M&A vs. IPO 4

Market Consolidation: Demand Response and Building Automation 5

Telecommunications Acquiring Smart Grid Capabilities 6

Adoption of IP Standards 7

Applications for Data Management and Data Analytics 7

Avenues for Attracting Partners and Investment 9

Economies of Scale and Scope: Impact on M&A 9

End to End Applications as Economy of Scope 11

100% Acquisitions: Preference for Strategic Buyers 11

Bridging the Valuation Gap and the Corporate Advantage 12

Data Security for Smart Grid 13

Foreign Investment and Smart Grid Development Globally 13

Peripheral Markets Moving into E&U 15

Q&A: White Spaces in the End-to-End Network 16

Q&A: Risks of M&A 18

Q&A: The Residential Market and Consumer Engagement 20

Q&A: Partnership between Colocation Sites and Data Management 25

Q&A: Methods for Evaluating Companies from the Banking Perspective 25

Q&A: When Will We See Public Exits? 26

Q&A: Structure of Utilities 27



Page | 2

Introduction

Mozhi Habibi (IBM): My name is Mozhi Habibi. I‘m the Strategy Manager for Energy and Utilities globally for IBM. I‘ve been at IBM for a little over a year. My main responsibility, essentially, is to take a look at emerging solutions: what is going on in the smart grid worldwide, what the trends are, what the new issues are, and what IBM is going to do about it. That includes partnerships; it includes a lot of conversations; and it includes M&A. So, that‘s my main role at IBM. Previous to that, I worked as head of product management for a company called Space-Time Insight, the geospatial visual awareness; before that I worked at Ventyx (which is now part of ABB) as head of strategic marketing, and before that at GE Power Generation. So, I‘ve been in the E&U space for quite some time.

Scott Henneberry (Schneider Electric): Scott Henneberry with Schneider Electric. I work in the Corporate Strategy Group for Schneider, and I‘m responsible for developing the global smart grid strategy, and then working with all of the businesses for Schneider for the implementation of that. I live in Nashville, TN. We have big offices in a couple of suburbs of Nashville. Historically, I have always lived in the US. I spent 20 years with Siemens in the energy and infrastructure and utilities space. And then, 5 years with a small company in power monitoring in Canada, and then was acquired by Schneider about 5 years ago. I‘ve come to the corporate space in the past year or so within the organization of Schneider.

Jeff Renaud (EnerNOC): I work at EnerNOC. For those of you who don‘t know, we‘re arguably the market leader in demand response, with north of 5 Gigawatts of dispatchable capacity under management; a relatively young company, founded in 2003, public since 2007. I lead M&A there. We‘ve been relatively acquisitive, given our short history, with about 11 deals done, overall, and 3 year-to-date. It‘s a fun role that I have. Prior to EnerNOC, I was at GE for about 5 years, where I was one of the people who built and led the Ecomagination Initiative there. Going back further, I‘ve got some marketing experience on the early stage – cleantech and software services side, an MBA and chemical engineering background originally. Riaz Ladhabhoy (Bank of America Merrill Lynch): Hi everyone – Riaz Ladhabhoy from Bank of America Merrill Lynch. I‘m an investment banker focused on cleantech companies. For smart grid, we cover it from two different angles – from the tech groups, who I actually sit with in our technology and investment banking group based in Palo Alto, and then I have colleagues, who work with the utilities, who are power and energy bankers. So, we come at it from both angles. I‘ve been covering cleantech companies now for about 5 ½ years. Prior to Bank of America and Merrill Lynch, I worked at Deutsche Bank Securities for about 5+ years, and prior to that I covered semiconductors. So, I‘m historically, a tech banker focused on—and obviously out by where I live, there‘s plenty of exciting smart grid companies out there. Prior to Deutsche Bank Securities, I practiced law for about 3 ½ years, close to 4 years, at another Silicon Valley law firm. So, I‘ve done a lot of transactions. I‘ve done every kind of financing you can imagine – cross border, both debt and equity, and converts – and I‘ve done a significant amount of M&A transactions as well. I‘ve been very deal focused, and this is a very exciting space to be focused on. Gary Rackliffe (ABB): Good morning. Gary Rackliffe from ABB. I lead our smart grid initiatives for North America. In my current role, this is working with partners, strategic acquisitions and investments. Also, working internally with the company, trying to cross the multiple divisions and businesses within



Page | 3

ABB, and make that transparent to both our partners, as well as our customers. I actually spend more time selling internally, I think, than I do working externally. My background, prior to assuming this position, I was in our sales and marketing organization, had a vice president role covering the Northeast and Mid-Atlantic sales region for all of our products; worked in strategic marketing for our power products and power systems business. And prior to that, I worked in our software business, ran the sales and marketing for the Americas, as well as parts of Asia Pacific for our SCADA/EMS/DMS/OMS businesses and also our market systems internationally. Prior to that, I was running our distribution management software business. Rilck G. Noel (Verizon): Rilck Noel, and I am the Vice President of Verizon Global Energy and Utility Practice. We started this practice about 2 years ago and we cover more than what we‘re typically known for as Verizon, such as our network, IT services, security. We provide solutions to customers along the line of business classes, engineering, organizational restructuring, regulatory compliance, as well as the technology aspect that we are well known for. We have made some very large investments in smart grid, developing solutions and also helping clients. And I am participating here today to learn about what‘s going on in terms of mergers and acquisitions amongst some of the partners we have (and I do recognize some of the names of those partners here) and share with you what I have learned from looking at smart grid, not just in the US, but all over the world, where we do have ongoing projects and we do have engagements with different clients.

Selecting Strategic Partners

Question- Mozhi Habibi (IBM): Gary Rackliffe, you said something about partners and looking at partners and M&A. How would you say that ABB looks at, basically, a strategic partnership and selects strategic partners? Gary Rackliffe (ABB): Well, I think the process really starts with the work that we‘ve done to map the smart grid landscape. So, we‘ve looked at where we think the industry is going, what are going to be the key technologies moving forward. Our company focuses principally on the utility sector, less on the downstream side of the meter on some of the distributed energy resources, although we have recently moved into that space as well. Through the mapping of the smart grid landscape, we look for white spaces – our portfolio versus where we think we need to be technology-wise. And that, I think, develops our short list of targets or potential equity investments that we have made, or, of course, acquisitions. Once we identify the white space, we look at the strategic technologies. We look at the fit in terms of is there any overlap with the products. Are there similarities in terms of the market channels or can we leverage our market channels for a company that we partner with or invest in? So, there‘s the channel aspect of it and the customer base. And then, we also look for vision and how we think the two companies would mesh together in terms of their strategic priorities and how they would align with ours. When we first started – you know, we haven‘t been all that active, except for the last two years – certainly on the equity/investment side, we were not in a lead position, we tended to be a secondary investor. But ABB has, I think, been more aggressive recently and has taken a lead role. We have made some major acquisitions, Ventyx being one that we concluded about a year ago. We just completed the acquisition of Baldor, on the motor side of the business, which, when you look at the debt plus the equity involved, that was over $4 billion. So, we made some pretty major steps.



Page | 4

Question- Mozhi Habibi (IBM): That‘s a good point. I think that the strategy of partnership, as well as M&A, with the merging of IT and OT now, has become a little more challenging and fun at the same time, because now you end up looking at partners that you traditionally had not looked at before. Jeff Renaud, Scott Henneberry, did you want to add something to that? How do you pick your partners? What is the strategy of EnerNOC or Schneider Electric? Scott Henneberry (Schneider Electric): Well, there‘s a couple things. Everything that Gary said is correct in terms of the process, and very similar for the other bigger players in the space, like Schneider Electric. There is also one that just comes across the doorway that you weren‘t expecting, that suddenly you‘re aware of, but you haven‘t thought about before. So, there‘s definitely that possibility. And there‘s one other case: all of the strategic players, the big players (ABB, Schneider Electric certainly) are principals in some venture firms. For example, Todd Dauphinais, he‘s here, with Aster Capital, and Schneider Electric is one of the principals in Aster. And we use that as a mechanism to keep our ear to the ground, to find the little start-ups. It would be a horrible disaster for someone like Schneider Electric, or Siemens, or any of the big companies, to immediately acquire a start-up with 5 people that‘s not out there and doing something. It requires it to be a little bit larger. But we use that kind of mechanism in order to keep our ear to the ground, to understand what‘s going on, and potentially to get some strategic synergies out of even the very small companies. Jeff Renaud (EnerNOC): From a process perspective, I think what Gary and Scott hit on is absolutely right. At EnerNOC, maybe the world is a little simpler for us because we‘re a little bit narrower in scope. I‘d say that we‘ve been less active on the big strategic partnering side than we‘ve been on the M&A side. Reasons for that, I‘m not entirely sure. Part of it is bandwidth, part of it is the opportunities you see. We view ourselves as being part of the application layer of the smart grid. So, from an infrastructure perspective, we just want to be open and compatible, so that lends itself less to a big strategic partnering path and more towards an interoperability path. On the infrastructure side and the applications side, we‘ve been more focused on organic capability developments and M&A. Mozhi Habibi (IBM): I think IBM does things a tad bit different from how ABB works or Schneider and some of the other larger companies; we have a VC group (IBM Venture Capital), but we don‘t necessarily invest in any companies and any start-ups. What we do is we have a great relationship with the VCs. Not surprisingly, the headquarters of our VC group is in Silicon Valley. So, we have a great relationship with a lot of VCs and we meet with them all the time. It‘s more of, like you said, ears to the ground. So, it‘s one providing the guidance, as well as hearing back from the VCs of the companies that they‘re investing in, or companies that we think they should be investing in, or at least technologies. We also host a lot of innovator-of-the-year events where we invite a lot of VCs. And we do that globally twice a year. We go to, I think, 12 different countries. We, basically, invite start-ups to come in and we have specific themes. We present their products and they get prizes, high value dollar prizes. We also provide good market and marketing help to many of the start-ups. So, it‘s a little bit different than how, say, ABB works.

Key Motivators for M&A vs. IPO

Question- Mozhi Habibi (IBM): Riaz, our banker, in your role with Bank of America Merrill Lynch, what would you consider to be the key motivators in the M&A and smart grid sector?



Page | 5

Riaz Ladhabhoy (Bank of America Merrill Lynch): I think one of the key drivers for M&A in this sector (and this sector has been very M&A heavy versus many of the other cleantech sectors that I cover) is that the capital markets don‘t necessarily know how to look at these companies. They‘re not like other tech companies. They‘re selling in utilities. Utilities have large projects, very lumpy. They often get delayed. They‘re very deliberate; years of pilot projects. For instance, IPO investors really like to see companies with smooth, up-and-to-the-right curves, and many of these companies don‘t have them. Two or three years ago there couldn‘t have been more buzz around some of the private companies in Silicon Valley, the AMI-focused companies in Silicon Valley, and how they were going to be the next big IPO. And it hasn‘t turned out that way. So you‘ve seen both public investors and investors in IPO not really know how to look this. I sit in the tech group, but this is not like other tech companies; we aren‘t selling to consumers, we aren‘t selling to commercial/industrial customers. The companies aren‘t selling to commercial/industrial customers, they‘re selling to utilities. So, it‘s a completely different animal, on the private side as well. So, I think, that‘s why you see that the large corporates have got a phenomenal opportunity to either, as Gary was saying, make acquisitions – he talks about selling internally. It feels like he‘s done a good job over the last couple years (in acquisitions, he talked about Baldor and Ventyx) – and also lead investments, because even private investors aren‘t really sure how to invest in these companies. In many cases, the VCs and the private equity firms don‘t have the skill sets to actually determine which companies are better than others. So, there‘s a huge opportunity for corporates to acquire companies and invest in companies, and really keep an eye on what‘s going on, because I think the investment community, both on the private side and the public side, aren‘t really familiar enough, and in many cases don‘t have the capabilities, to invest in these companies. That will change at some point, and we will see some IPOs from these companies. And the first group of companies that do go public will go ahead and educate the market. But for now I think that corporates are in a great position. I think that is one of the key drivers for M&A in this sector.

Market Consolidation: Demand Response and Building Automation

Question- Mozhi Habibi (IBM): Jeff, you said that your company is different than ABB, Schneider or IBM, where you‘re very focused on demand response. What do you think is the driver for the building control giants to get into the demand response sector? Jeff Renaud (EnerNOC): Putting words in their mouths, as I look at it, I would say it‘s a no brainer on one level, in the sense that demand response is something that leverages either their install base or the systems there that they‘re trying to sell to their customers, and brings another value stream to those customers. So it‘s a way to improve the economics of the customer/investment decision, bring a new service offering to their install base, and build and strengthen their customer relationships along the way. I guess the question for those guys, and there certainly has been a lot of M&A towards that end with Johnson Control buying Energy Connect, Siemens buying Site Controls and Honeywell buying Akuacom. Everyone‘s kind of putting their chips down in the demand response spaces. Using Johnson Controls as an example, the market they serve being the larger commercial building space, is really a small fraction of the demand response universe. So the question for those guys is to what extent do they stay in their comfort zone from a customer perspective versus going more horizontal or broader in the demand response space. I think that it remains to be seen how they‘re going to play that out.



Page | 6

Question- Mozhi Habibi (IBM): How do you think that affects, say, OpenADR? How do you think that would affect the space? Jeff Renaud (EnerNOC): OpenADR is obviously a standard that‘s been developed primarily in California to implement automated demand response. Automated demand response is something that can enhance the value and capabilities of demand response as a resource by being, clearly, quick to respond, enabling things such as renewables firming and ancillary services, frequency regulation – services that go beyond demand response‘s core value today, which is as a capacity resource, as an emergency resource for utilities and grid operators. So we‘re part of the OpenADR alliance, it‘s a standard that we think still needs some work, but ultimately it‘s a standard that we‘re behind, and we think that there‘s a lot of benefits to the industry in pushing that forward. And if you look at our M&A activity, stepping back to the Auto-DR space more broadly, we‘re very bullish on Auto-DR. Two of the last three acquisitions we‘ve done, are not solely Auto-DR related, but had an Auto-DR component to them. So, we‘re excited about the space.

Scott Henneberry (Schneider Electric): Building automation is, of course, one of the big businesses that Schneider Electric is in, but unlike some of the companies who are only focused in that building space, we also have an industry business, we have a data center business, etc. So, the same restrictions apply across many of those spaces. There‘s no question that demand response is quite mature in the US. It is not as mature outside. That‘s one of the very interesting future evolutions, to see how that will evolve and what is required in the market in order to create a demand response industry in that country, in that geography, etc. So those are some of the things we‘re looking at. It is not specific to building automation. That is a very important aspect to it, but it really covers all of our businesses.

Telecommunications Acquiring Smart Grid Capabilities

Question- Mozhi Habibi (IBM): Rilck of Verizon, can you give us an overview, from your point of view, of major partnerships or M&A that have happened, basically, in the telecommunications providers and in the smart grid world? Rilck G. Noel (Verizon): I will look more at acquisitions. There have been some partnerships, and Jeff has mentioned a couple from an EnerNOC standpoint. Comverge is a demand response services provider. And they have not been acquired, they still stand alone, but the way we view it, there is a trend towards more consolidation in the industry in terms of small partners coming together. One thing that at Verizon we are doing – we do recognize that you don‘t build the practice overnight – we are in acquisition mode or alliance/partnership mode, trying to get the expertise that we don‘t have in house. Many of you have heard of our recent acquisition of Terremark. It was driven primarily by the need to have large data capacity, be able to have a lot of data centers and provide cloud services to our utility clients. Demand is, again, driven by smart grid. When you look at the number of monitoring and control devices that we have out there, as well as the number of smart meters that are being deployed, the volume of data has exploded. The large utilities can make the investment into the infrastructure, but when you look at the co-ops and munis, we are offering solutions to them that are on a per-meter basis, for example. When you look at meter-to-cash, from reading the meter until collecting the cash from their customers, instead of building infrastructure for that (the data, warehouses, telecommunications, infrastructure), we provide the services to them. To get back to your question, there is a trend, people are acquiring other companies, and the small companies are either being acquired or they are acquiring partners to become much larger



Page | 7

and be more efficient at providing services. On a related trend, if you look at the investor owned utilities, they are also in acquisition/merger mode primarily because demand has been flat or has been declining in some markets. So there are some very big mergers that have been announced, that have been consummated at the investor-owned utility level, and we expect to see more of those in terms of trends. So both partners and providers are trending, telcos are acquiring the capabilities that they don‘t have, to provide smart grid services on a much broader level to everyone. And also, the IOUs, like the ConEdisons and First Energy‘s of the world, they are all looking to acquire other companies, consolidating their service territories.

Adoption of IP Standards

Question- Mozhi Habibi (IBM): How do you think adoption of IP standards would affect M&A activities, especially for, God forbid, a telecommunication company? Rilck G. Noel (Verizon): The industry in which we operate, be it the telco industry or the utility industry—by the way, my background is on the utility side of the house, I don‘t have a real telco background, although I do work for a company that is known as a ―teleco‖—so the adoption of IP standards I don‘t think will have any major impact because right now, I can give you some examples, we are developing solutions that are based on IP to do some monitoring of transmission, distribution, and generation equipment that is out in the field. We are not ready yet to do the control, basically opening and closing circuits using IP. So IP version 6, IP version 4 being adopted, to me, I don‘t see it as having any significant impact in how the industry operates. That‘s my personal view. Mozhi Habibi (IBM): Anybody else have any ideas about IP standards? Do you feel the same way? Scott Henneberry (Schneider Electric): I think it‘s clear that they‘re coming. Unless the device is so small, and has such a small cost point, that it‘s an issue, and that point is getting lower and lower as we move on, we‘re clearly moving in that direction. And no one is really advocating a strong, proprietary position these days. Rilck G. Noel (Verizon): Open architecture, open everything, open development is what‘s being advocated.

Applications for Data Management and Data Analytics

Question- Mozhi Habibi (IBM): Scott, Rilck just mentioned a point about the immense amount of data that all of us, talking to our clients, hear about. How do you think any recent M&A activities will be able to help utilities, and potentially some of the new people coming into the market, with data management and data analytics? Scott Henneberry (Schneider Electric): This is a very interesting topic, and in some ways it‘s been around for a long time because it almost borders on an artificial intelligence--you have all this data out there, how can the machine figure it all out without human intervention? So people have studied artificial intelligence for a long time, we‘ve been very skeptical about solutions involving neural networks and that



Page | 8

kind of thing. I would say what we‘re seeing is that there‘s an evolving area of technology around analytics—I know IBM is quite heavily involved, obviously Google and Microsoft, etc.—so the big IT players have a spin on this that the conventional industry players really don‘t. And we‘re seeing small startups, which certainly claim to be able to do the data mining, and understanding exactly how residential customers are behaving, and be able to go in and automate load shedding, and other kinds of things. I don‘t think it‘s there yet, we‘re still understanding what it means. There‘s no question that it‘s an enormous amount of data, coming from all parts of the grid now. That data will be pretty critical, pretty important, to managing the grid in a smart way. So I‘ll give you just one example to be very clear cut about an application. It‘s called dynamic line rating; so let‘s say that you had a wind farm. And obviously wind farms are located often where there aren‘t people, they‘re far away, where the wind blows quite strongly. And the line connecting that to the grid is, conventionally, rated for worst-case environmental scenarios because you wouldn‘t want to put more current through that than what it could stand; you could do damage, you could have fires, it could be dangerous, etc. That means that normally, under normal environmental conditions, it is way, way, way underutilized, and sometimes limiting the amount of energy that that wind farm can put onto the grid artificially. So what dynamic line rating does is use sensors to measure things like temperature, wind direction, wind speed, solar radiation, etc., and have a model of the line that can be updated in real-time, to drive protective settings into the protective relay, so that you can push more power through that on days when it‘s not right at the very edge. But to do that requires an enormous amount of data, in real-time, with computing capability. There are real benefits but it‘s a real challenge to be able to get there. So we‘re seeing real live applications, data analytics, some of the things IBM and others are doing, but it‘s still pretty much in its infancy, frankly. It‘s still by and large just big SQL databases that people need to get information out of in order to spit bills out, etc. So there are a lot of real applications that are coming from these, we just have to be careful because it‘s right at the edge of technology. Mozhi Habibi (IBM): I agree with you, I think the challenge is how do we actually utilize the data to make the smart grid actually smart, number one. Number two is the technology, the computer power and all that stuff, and all of that has to be done in this box of heavy utility regulation, which I think is the issue that Googles and Microsofts don‘t really get because they keep thinking, ‗hey data, we use data, customer data and do all this other stuff,‘ but you‘ve got situations where consumer data cannot move out of the state line. It belongs to the consumers. You just take that data and go do whatever you want to do with it, or have outsiders coming in and accessing that data because it‘s sitting in some database, and being able to do stuff with it, like market things to customers. It‘s not that simple because it‘s a heavily regulated industry. So it‘s a bit of a challenge because you‘re working within a group. Jeff Renaud (EnerNOC): Maybe a couple comments from our perspective, which is a little bit different and maybe more C&I-centric, versus utility-centric. In our world, data acquisition is still a big issue, and what‘s still a fundamental issue is how do you get the data? And really the path we‘ve gone down is we‘ve deployed our own AMI technology, essentially on the backs of the demand response market. So we‘ve got on the order of 10,000 commercial, institutional, and industrial sites that we monitor in real-time on hardware and technology that we‘ve deployed and we own. So we are starting to acquire a lot of data. I think it‘s something on the order of 25 Gigabytes a day of new data where we‘re bringing in to our network operating center, so it is a ton of data even just in the context of demand response because it‘s 5 minute interval data from all these sites, and we are helping our customers analyze that and understand that.



Page | 9

One of the areas we play in is monitoring-based commissioning of big commercial buildings like this, and that can mean bringing back 1,000 points or 10,000 points from the BMS system in real-time, and trying to make sense of it. So it‘s a huge challenge, and I think the solution we see today is it‘s clearly a mix of technology and good ol‘ fashioned energy engineering. So the services we provide to our customers combine the two. We‘ve got commissioning engineers that have a lot of data and analytical tools at their disposal, and ultimately we put those pieces together into a service offering for our customers. And clearly the intent is to make the software smarter over time, but we don‘t think it‘s there on a stand-alone basis today, and it may never get there.

Avenues for Attracting Partners and Investment

Question- Mozhi Habibi (IBM):. Riaz, what advice would you give to a startup to try to attract major partners, strategic partners, or even investor funding? Riaz Ladhabhoy (Bank of America Merrill Lynch): I‘ll talk a little bit overall before I get into that around how the investment community is viewing this market. I think two or three years ago, when we first started talking about smart grid, everyone was so focused on the meters, they were so focused on AMI versus AMR and getting smarter meters, and I think we‘re evolving quickly. The investment community is evolving quickly and realizing that it‘s much more than just the meter. We‘re now talking about demand automation; we‘re now talking about efficiency within the grid, and through the substation; we‘re now talking about the home automation network, and that‘s going to become more and more important as we do now have smart meters; so what we can do with the appliances, and what‘s going to be the communications gateway in the home; we‘re now talking about all the data that we‘re going to start collecting, so the data management, analytics, building security, etc. And then Scott talked about how are we going to integrate renewables into this? I think in Germany, a research analyst put out a report a couple of months ago projecting Germany to have maybe as much as 10+% of their electricity generated from both wind and solar by, say, 2020. That‘s a huge, huge challenge for their grid; so integrating renewables, as well as integrating electric vehicle infrastructure, and how people are going to start charging that. I think that the thinking is evolving quickly. So as a startup, whereas a couple years ago everyone was so focused on the communication technology around the meter and the two-way communications, now I think there are many other areas where you can play. And you‘re going to get attention, and you‘re going to get investors that are more knowledgeable. I mean, to be frank, I follow fees, right, so I‘m now so much more focused on the companies—you know Ventyx was a great example—we need to focus on the companies that are focused on the data management/analytic services side of things. That‘s getting much more interesting to me as a banker than just strictly the two-way communication of the meter. From a valuation perspective, the Ventyx acquisition by ABB seems like it was a win-win, a very successful deal for both parties.

Economies of Scale and Scope: Impact on M&A

Question- Mozhi Habibi (IBM): Gary, you were talking about white spacing and M&A strategy; how do you think economies of scale, or even economies of scope, impact M&A?



Page | 10

Gary Rackliffe (ABB): I think just a couple of different dimensions, when we look at economies of scale or scope, and since we were just talking about Ventyx, let me use that as an example. So, when we looked at Ventyx, and we now have incorporated that into ABB, there‘s a technology piece and product piece. And what we actually did, is we took our operational software, our SCADA, energy management systems, distribution management, outage management, and our market systems, and we moved that from ABB, all the software operational products that we had, and moved that into Ventyx with the information technology product base. And that gave us an additional economy of scale that we are now able to offer principally to our utility customers. So we can bring an integrated IT/OT solution that presents a larger footprint in the marketplace than either company had previously. The second part of the economies of scale is the fact that ABB is a global company. Ventyx thought they were global until they actually became part of ABB, and we truly are a global company. So we‘ve been able to get them into customers in China; part of the Ventyx portfolio, for example, is the maintenance scheduling and the asset management of nuclear generation, where they enjoy extremely strong market share. And we have now gotten them into nuclear power plants in China (not Japan, but China). And so that extension of the customers that they can reach through the ABB channels, where we operate in over 140 countries, gives a huge boost in terms of market potential that we can offer to a company, such as Ventyx, that is now part of ABB. So I think there are a couple of different perspectives. Technology extension—we were talking about artificial intelligence or business intelligence—so we made an acquisition of Obvient through Ventyx, and what that does is, not only do we get a product that we actually, at ABB, used historically to provide a dashboard and information from SCADA/EMS systems—so in other words, we can archive that, and then run Obvient software to provide basically some business intelligence where you can data mine SCADA data, so you can give some information to the utilities. So now we can extend that onto asset data. So you combine something where we manufacture key components, like transformers and breakers—we can monitor that, we can use communications to pull the data back—and now we also have analytics that we didn‘t have previously, and we can take performance algorithms on this type of equipment, and actually drive an end-use process for customers that wasn‘t previously available. So again, that‘s an expansion of the scope, and leveraging the technologies in two completely different areas, one being manufacture of equipment and understanding how they perform, how they age, what you need to measure; and then actually capturing all that information, applying performance models against that to determine what needs to be maintained. It takes condition-based maintenance to a new level. And so those are very specific examples, but an answer to a general question. Mozhi Habibi (IBM): No, that‘s a good point. I think, from an IBM perspective, for example, we‘ve acquired some companies that were traditionally not in the E&U space (the energy and utilities space) but there‘s a shift, there‘s a change in the space. There are certain things that the E&U companies, the utilities, didn‘t really have to worry about that much, but they do now. So, as an example, we acquired a company called Netezza. It‘s a data management and appliance company. Netezza is a great example of a solution that does not traditionally fall in the E&U industry, but at IBM we‘ve definitely taken Netezza and tried to move it into the E&U space. We acquired a company about six, eight months ago called OpenPages. They‘ve got a killer product, but their focus has been banking and financial systems, and they do risk management and compliance reporting. Now we‘ve taken that and moved it over to energy and utilities. E&U is a heavily regulated business, there‘s a lot of compliance reporting that is needed, and so shifting the focus from banking to E&U makes sense. So, to reiterate, we‘ve mentioned scope of geography and technology and solutions, and also moving peripheral solutions into E&U space.



Page | 11

End to End Applications as Economy of Scope

Gary Rackliffe (ABB): When we did our smart grid roadmap or our landscaping, one of the things that we identified is that a lot of the applications are what I would call end to end applications, and I know that‘s an overused term, but just a couple specific examples: I mentioned the asset management: going from asset knowledge, censors, the data collection, the archiving, the business intelligence, the dashboard, than actually triggering, the work orders, and then executing the work all the way to communications, to trucks and the field. So a lot of people use buzz words, so we can go ‖transformer to truck‖, some people say ―source to socket‖ and other buzz words, but it truly is an end-to-end application. Distribution grid management, and other smart grid applications, same thing. All the way from the control room to that device out in the field that you‘re trying to control, whether it‘s a cap-bank for efficiency, or a recloser, or DA switch for reliability, there‘s a lot that needs to take place in between, in terms of communications, the data management, and the analysis. And even with distributed energy resources: we look at the generation piece, the resource management, what is the capacity and the pricing signals that are coming from the generation fleet, to how you manage five or six different technologies that are at the end-user; whether it‘s vehicle charging, energy storage, demand response; whether that‘s price-driven or direct load-control, or aggregation; and how do you manage all that and then take it all away to the actual control over the devices, either in the home, or the electric vehicle charging, or actually implementing the pricing signals? And so when you look at that end-to-end landscape, and the data points, that‘s also an element of this economy of scope, I think, or how all of these pieces fit together.

100% Acquisitions: Preference for Strategic Buyers

Scott Henneberry (Schneider Electric): There‘s an aspect that I‘d like to bring out that has to do with the scaling and scoping. The things that Gary is talking about are possible when you can do a 100% acquisition of a company. And this is a particularly challenging area in M&A, coming from the perspective of a big strategic investor. And what it really comes down to, I think, is the advice that the bankers are giving the customer going into the process; because if the valuations can‘t be achieved—you know the small companies have very big eyes, and big hockey sticks, in terms of their expectation of what valuation is—often greater than what the large companies are willing to pay. But the issue, for example, in our case, we‘re not interested in being a minority owner of a small company because then we have very little influence and very little control. And the amount of organizational back-and-forth in being a partial owner, even a majority owner, but not being a 100% owner, is also very difficult within a large organization because it‘s a separate legal entity, it‘s separate transactions, and everything else. So we clearly prefer a 100% acquisition when it‘s in the strategic side of the business. But that means that we often can‘t reach the valuation that the small companies have to have. So to be creative, we might do some sort of an earn-out, or some sort of other structure, but all of those mechanisms get in the way of the really good, strong integration Gary refers to. So it‘s a real difficult situation. In my mind, as I‘ve said, it comes down to what advice the bankers are giving the clients because if they want to remain in the business and remain controlling the business, and they want to do this to gain access to capital to grow larger, but they don‘t want to walk away and retire wealthy, then I think they really ought to be considering financial buyers, and not necessarily strategic buyers. It‘s very difficult, frankly, for large companies to keep the entrepreneurs engaged and interested, and to live within the structure of a large company, and still be motivated to go forward. It‘s a real challenge. So you almost have to look at every individual transaction,



Page | 12

and the people involved, and the personalities, and it‘s just a function of how well they would fit with your company within your organization and whether the legal structure is 100% or not.

Bridging the Valuation Gap and the Corporate Advantage

Riaz Ladhabhoy (Bank of America Merrill Lynch): Bankers can get pretty creative around valuation structures, and I think the earn-out is a great example of that. I think in many cases it works, and in many cases it keeps the management team of the company that‘s been acquired motivated for years to come because they got to hit those milestones. So I think that‘s one way of doing it. Regarding valuation as Scot touched on, the acquired companies generally have stars in their eyes and think about their hockey sticks; they all have models that really do go up and to the right, in a really massive and quick manner. So to bridge that gap, I would say right now this is pretty unique opportunity. The capital markets are not open to these companies just yet. They really aren‘t. The public side investors are not ready for these companies just yet. So I think the corporates in smart grid have a greater advantage here than almost any other industry that I‘ve ever seen in technology. So you have that leverage. Companies aren‘t doing as much of the dual track, the IPO, what we call the dual track, which is: we‘re going to go out and we‘re going to prepare our s-1, we‘re going to have a day where we‘re going to get it and put it on file, and we‘re also going to talk to corporate acquirers. And we haven‘t seen a great IPO in this sector yet. So I think the corporates have an advantage for a little while. The point I would make on the valuation gap is, it seems to me, from listening to this conversation so far this morning, that there is so much more strategic value for these companies to be a part of an EnerNOC a Schneider a Siemens, an ABB, a GE; there‘s so much more strategic value here than in other tech sectors. You talked about the sales channel—there‘s so many other synergies that go along with this sector, and, again, it‘s interesting for me to cover this sector from a tech perspective because most tech companies that you cover either sell iPods or they‘re selling solar panels for commercial and industrial uses, and this is not that case. This is the case where in many cases, acquirers really do need companies like yourselves. And so there‘s a real strategic value there. It feels like the valuation gap has been bridged many times to date, and will continue to get bridged. And hopefully we can play a role in that. Jeff Renaud (EnerNOC): And I‘d like to add, we think our IPO is a pretty good one. The valuation one‘s a tough one, absolutely. We all have the same—every conversation has the same dynamics. So from our perspective, we try not to use earn-outs. There‘s no hard and fast rule there, but we prefer to do deals that don‘t require them. And so we look for deals that we believe in strongly enough, that either A: we can get comfortable with the company‘s pro forma or B: more likely, we think there‘s enough leverage we can bring to that organization post-acquisition that we can get there from here. Mozhi Habibi (IBM): You know when you walk into that meeting the first time, with the stars, going ‗oh God, this is going to be tough.‘ You made an interesting point on the strategic partnership of these companies. Because of ABB and Schneider and IBM and others, we‘re used to dealing with utilities, it is a whole different world than any other industry. You know, I was at an event, arranged by a VC, and was talking to a few small startups. And two of the startups basically came up to me and said, ―so what‘s next now that smart grid is done?‖ And I was like, ‗uh, did you get a memo that I didn‘t because I don‘t think smart grid was done.‘ His response to me was, ―well I have a smart meter in my house. So, done! K, check, move on, next thing.‖ So you‘re obviously right, the same way that we need them because we need



Page | 13

that entrepreneurship and that technology and a lot of stuff, they really need us, us being the larger companies.

Data Security for Smart Grid

Rilck G. Noel (Verizon): If I may make a comment regarding smart grid, we are talking about startups. I think an area that is really blooming is security because we were talking about a large volume of data, and we recently looked back at Verizon, on the security side, over the past 8 years acquired about 92 companies, and about 50% of them were security, or security-savvy, companies. And as you develop new IP standards, as you have a large volume of data being stored, static security, or being transmitted back and forth, you need to make sure that this data is secure because someone getting access to it can cause all kinds of issues, one of which is breach of some regulatory constraints or regulatory requirements that they have, to make sure that nobody has access to that data. I don‘t know if recently you received those emails from Epsilon I believe, saying that your data was compromised in the sense that somebody might have had access to it. So because of those requirements, people are very, very worried about their reputation or risk of any type of breach into their data. So as new companies are being developed, as you are making investments into ventures, security is a very, very big piece of it, and we believe in it, and would like to maintain our premier leadership position from that standpoint.

Foreign Investment and Smart Grid Development Globally

Question- Mozhi Habibi (IBM): What do you think is the role of foreign investment in smart grid?

Gary Rackliffe (ABB): Yes, I‘m trying to figure out just how to answer that because some people view us as a foreign investment company. Scott Henneberry (Schneider Electric): So, in our case, we‘re Paris-based, but we have something greater than 20,000 employees in the US, we do something like $5 billion in the US. I mean, we‘re a significant US presence, and so I don‘t really think of us as foreign investors at all when you talk about buying companies in the US. But on the flip side of that, to Gary‘s earlier point as well, one thing that does allow, is for us to leverage all of our international presence by taking the solutions that we find and opening up markets all over the world that would never have been able to have been gotten to otherwise. Question- Mozhi Habibi (IBM): Do you see VC activities from outside US that are active? Riaz Ladhabhoy (Bank of America Merrill Lynch): You know, the VC community is so much bigger and more evolved here in the US than they are really anywhere else in the world, that really on the VC side, I think it‘s still primarily US—the point I‘d like to make on this is, you know in smart grid, the US companies really are leading the way. The deployments in the US really are leading the way relative to Europe. We really are the leader in terms of technology build-out, and so you‘re seeing the foreign/global companies coming to the US, to look at US companies, to look at how we‘re building it out, and so I think that‘s why there‘s so much interest from global/foreign companies here in US companies and US investments.



Page | 14

Rilck G. Noel (Verizon): A couple of comments. First of all, as you all know, 49% of Verizon Wireless is owned by Vodafone. And Verizon Wireless is heavily involved with helping the deployment of smart meters, providing the chips, the backhaul communication—Verizon as a whole. So there is a heavy foreign investment already in smart grid here. But as I move around the world, I‘m looking at France. From an infrastructure standpoint, when you look at the transmission, distribution, and generation, when we look at where we are in the smart grid, I think we are in the leading position. But when you look at what they‘ve done, for example, regarding home energy management--it‘s automatic pretty much—I think they are far more advanced than we are. I‘m looking at smart grid in terms of the analytics, predicting what can happen, using synchrophasors, looking at precursor to faults—I was in Vienna, Austria, has really some institutes. They are conducting studies that have far-reaching implications in terms of the development of smart grids. So in terms of looking at it, and saying on all fronts we are in the lead, that may not necessarily be true from a scale standpoint, given the size of the US, definitely. But some people are basically conducting studies that will have long-term and very far-reaching implications in terms of how we deploy smart grid and how we, particularly, monitor and control transmission and distribution system. Mozhi Habibi (IBM): I agree with you, I think there are, from what you just said, as well as renewable energy, as well as electric vehicles, transmission, distribution, automation, a lot of that, there‘s a lot of stuff going on around the world and we need to embrace all of that and learn from that technology, and see their mistakes and learn from their successes. Riaz Ladhabhoy (Bank of America Merrill Lynch): To interject, I was just speaking of leading AMI deployments, but I think you‘re right. Rilck G. Noel (Verizon): Even in AMI, when I look at it now, about five years ago they deployed 27 million meters, and that is going on. The other comment I wanted to make, when you look, for example, at China and Korea (especially China) did not have an old grid that they needed to replace, so everything they are building right now is based on new standards, so they‘re building ―the smart grid.‖ And we can learn a whole lot from them, and every time I go to Korea or to Japan, they have villages that have been built to demonstrate their smart grid technologies and those things are working. And I kept being invited back, and we are working on a couple of joint projects with some Japanese companies from that standpoint. So we shouldn‘t lull ourselves into a false sense of security thinking that we are cutting edge. In some areas we may be, and the one that I‘m particularly thinking of may be synchrophasors, or communications, or security of the grid, because security of the grid is something they are aware of, they do have a liaison with our NERC/FERC CIP people here, but it has not hit home yet in Europe, and I think that‘s an area that is ripe for startup, or someone who would like to basically go and develop a market or strengthen and enhance the market there. Mozhi Habibi (IBM): I agree. We just have to remember—sometimes I get questions like, ‗do you think China is ahead of us,‘ or something. It‘s a little bit different when the government tells you, you know, do this, and then you do it. That‘s what happens in China: ‗you are all going to drive electric vehicles…‘ Rilck G. Noel (Verizon): Bad electric vehicles.



Page | 15

Peripheral Markets Moving into E&U

Question- Mozhi Habibi (IBM): Well, it‘s a little bit different than having it be a choice of the consumer. Probably our last question before we go to the audience: What peripheral technologies or markets are coming into play in the E&U space? Scott Henneberry (Schneider Electric): We touched earlier on the data analytics. Although that certainly has a lot of other applications besides smart grid, it‘s extremely relevant, and one that occurs to me. Mozhi Habibi (IBM): One that I found interesting: At IBM, we‘ve done a couple pilot projects where we‘ve talked with companies like Whirlpool Appliances. It‘s odd when you‘re used to talking with utilities, to now talk to these guys with washer and dryers. Jeff Renaud (EnerNOC): Yeah, well, peripheral can be interpreted in a number of ways, but if you look at one of the recent acquisitions we made, from a market segment perspective, that was peripheral to us and new to us, was acquiring a company with deep expertise in irrigation. And in parts of the country, and in major parts of the world, irrigation load is a huge, huge part of overall demand and peak demand. I think in California, I know I‘m going to get the number wrong, but something like 1/6 of the electricity in California goes to move water around. So it‘s a huge new market segment for us that we can bring to our existing open market programs, our existing utility customers, and also go and sell that as a distinct offering into the marketplace in areas where agriculture is a big part of the peak load. Mozhi Habibi (IBM): I agree, I thought about this past DistribuTECH in San Diego. They had the Volt there and the Prius there, so it was very interesting because it was a bit like an auto show. The other thing was that I‘d never been to the CES show, the Consumer Electronics Show. I‘d never been there, you know, what does that have to do with the utilities? But it‘s like TVs, and, like I said, washers and dryers. And the little consumer devices, it‘s all very interesting. It‘s kind of an interesting thing to be in this new sexy industry. Scott Henneberry (Schneider Electric): But what you‘re talking about, it shows us a trend which we‘ve been seeing for the past 18 months or so. Jeff might challenge this, and I‘ll let him have that opportunity, but 12 to 18 months ago, if you said ‗smart grid‘ in our industry, people were thinking it‘s a utility focused thing, it‘s distribution automation, it has to do with operations and synchrophasors and all of that stuff. But in the past 12 or 18 months, it‘s becoming much, much more demand supply balance oriented, and people are really thinking more that the smart grid is an intelligent balance of supply and demand. That‘s why I‘ll let Jeff challenge this because he‘s been in the demand side for a long time, but I think the popular notion of what smart grid is, is really moving more along those lines. Jeff Renaud (EnerNOC): We‘ve come at it from the demand side for a while now, and we‘ve always been a firm believer that that‘s a key element of the smart grid, and it‘s interesting , I guess I‘ll just note, people don‘t consider EnerNOC as a smart grid company, and I‘m not sure why that is. But we‘ve always thought of ourselves as a smart grid company, and we think demand response is an application of the smart grid, ultimately, at the end of the day.



Page | 16

Riaz Ladhabhoy (Bank of America Merrill Lynch): And the only other technology I would add is the integration of renewables I think is going to become more and more important. And storage technology, we‘re going to have to start thinking about that, when it comes to smart grid. Jeff Renaud (EnerNOC): And that‘s, again, from my myopic perspective, we do see a lot of that emerging, and it‘s still small scale, and it‘s still early days, but we‘ve got multiple active pilots around using demand response to firm renewables. And in California, that‘s the big reason why they‘re so aggressively pushing Auto-DR, as, ultimately, I think it‘s either the CEC or Berkeley National Lab, or the combination of the two that‘s on record as saying that they view demand response as being able to provide, in conjunction with storage, a significant percentage of the firming required to support their ambitious RPS goals.

Q&A: White Spaces in the End-to-End Network

Jesse Berst (Smargridnews.com): I have a question. This may be for Gary and maybe Scott, and you Mozhi, people who are trying to take that big picture view. So as you look at that ultimate network, ten to fifteen years from now, end-to-end, turbines to toasters…where are some of the white spaces still? The gaps where we need innovation to create this ultimate grid 2.0? Gary Rackliffe (ABB): I think there‘s a couple of white spaces, one that I‘d identify would be sensor technology. We still need to drive the cost of sensor technology down. Communication costs are decreasing, which enable a lot of the smart grid technologies and applications. And I think the other development area is going to be at the distributed energy resource level. We talked about electric vehicles. There, there‘s an issue of battery cost. Energy storage, if you‘re using batteries, again, for energy storage, to make that truly competitive and something that you can integrate into the grid on a wide scale basis versus just a pilot, we need to see an order of magnitude of 50% or more reduction in the cost of energy storage technologies to really drive that. And then I think we‘re going to see that if you do look at smart grid, both upstream in terms of the generation transmission and distribution, and you also define it as technology downstream… On the consumer side of the meter, the tremendous amount of development in terms of appliance control. I do think in the residential market, it has to be automatic to have a real impact. So it has to be a thermostat that can take a price signal and then adjust the comfort level in the home. Or it has to be an appliance that automatically locks the defrosting of the refrigerator during peak rate periods. And I think until we get to that stage, we haven‘t truly implemented the full scale of smart grid. Renewables: within my company some people accused me of smart grid taking over everything, because I incorporate electric vehicle strategy into smart grid because I view it as a distributed energy resource. When FERC Chariman Jon Wellinghoff talks about using electric vehicles‘ spinning reserve for generation, we‘re now talking about a vehicle plugged into a customer or resident that an ISO is going to use as an ancillary service for spinning reserve. We‘re not quite there yet, but that‘s the vision that I see. So it‘s at the edge of grid distributed energy resource level where I think a lot of the integration and development needs to take place.

Scott Henneberry (Schneider Electric): So, a couple of areas…Gary obviously mentioned the storage thing. I think from a technology perspective that‘s probably the biggest. Price point is not where it needs to be to be able to effectively roll out energy storage. When it gets there, and when we can‘t it will change



Page | 17

a lot of things dramatically in terms of how the grid is structured. The data security is a big issue that we‘ve talked about already. It‘s really almost non-existent. There are people working on it, but given the potential breach that is possible, it‘s something which is definitely going to have a lot of attention paid in the future. There is one aspect that occurred to me while Gary was talking. It‘s not just technology issue. It‘s also a business model and a market structure issue. So for example, at least from my perspective, one of the reasons why the demand response industry in the US is so much more advanced and further matured than anywhere else in the world, has to do with the federal government in 2005 saying that the demand side resources will be treated on an equivalent basis to supply side resources and really pushing the ISOs to create a market so that aggregators could exist. So there could be profitable businesses made. A whole lot of places around the world are just aren‘t set up so that that can happen. So the white spaces, as you say, are not just technologies, it‘s also the market based and business models. Mozhi Habibi (IBM): I think that‘s a huge point because when we talk about white spaces, traditionally, it‘s always, technology. Where do we fit in with the product here so that we can have a whole integrated solution? The market is extremely important. For example, there are issues with electric vehicle and integrating the grid, and ISOs using the electric vehicles as storage or spinning reserve. But for electric vehicles to take off the way it should to get to that grid 2.0, the infrastructure available for the electric grid has to be at a point where me as a buyer of a car no longer has to worry about, ―Okay I can go buy an electric vehicle, but where on God‘s earth can I charge it?‖ It has to be so simple from ―fuel taxes‖, to charging, to roaming charges, to infrastructure and so on and so forth. All of those are white spaces from business model perspective as well as technology perspective. That is not traditionally anything a utility looks at, but it is something definitely that potentially an oil company, for example Shell, could look at or a Citi could look at, or the Federal Government, those are white spaces. Rilck G. Noel (Verizon): Regarding the electric vehicle, I want to share with you another white space. After two years you‘ve leased your electric vehicle and you‘re returning it. Valuation of the battery: what is the remaining life of the battery? So there are a lot of companies right now that are looking into implementing a chip in there to see what kind of usage, and how many times you charge and discharge a battery, to be able to give you a fair value for it. But big picture, looking at large white spaces, literally…Smart grid has been implemented very, very well within the service territories of a lot of utilities. Where we don‘t have a very effective and efficient smart grid implementation is... Enter utilities. Basically when you look at the different service territories, transmission systems, transmission lines between those, they are not there. Maybe two years ago, I was in Washington at Smart Grid week. In Japan and Korea, they are talking about building…part of their plan is to build a high voltage transmission system covering a whole country. But here we don‘t have that. Although there is FERC, we are still fighting to build transmission lines and I don‘t think it is done within a master plan. We don‘t have that. And for smart grid to become a reality, that has to take place. So if you‘re looking to invest look at companies that are very good at building power by transmission lines/distribution lines because that is going to be the next ones here in terms of white space. Bruce Sher (Viridity): I had a question on white spaces, you know I think about energy storage as kind of the secret sauce. Because electricity, as soon as it‘s produced it‘s consumed. There‘s a way to load shift and get demand side resources more efficient on the grid that smart grid to me becoming more efficient,



Page | 18

and not always looking to a generator to use the next megawatt of electricity. So, Scott, we met a while back, talking about buildings. Buildings are storage devices. We can load shift with existing control systems that are already out there. Gary mentioned the thermostats, the smart thermostats. We have smart buildings. They can hold energy. There‘s a way to get that onto the grid and really change the landscape and help the utilities manage congestions at their feeders. So those are the areas that we‘re concentrating on at Viridity. We‘re a startup company. We just got our second round of financing. We went to the VC route, and different routes that we can go. So just comments back from you guys as to how to we use our existing resources with batteries, and make a smarter grid with what we have as opposed to always looking to invent something new. Scott Henneberry (Schneider Electric): It‘s absolutely correct, and as we said before, demand side is a key element critical to the smart grid. Beyond the building automation per se, there‘s a pretty fast-knitting application which I‘ll quickly throw out, and that is, we‘ve been seeing more and more data centers interested in participating in some of the programs. Data centers have always participated with emergency generation, as has hospitals. For my money, hospitals are just as critical as data centers. But anyway, the notion of virtualization in the data center space they call it ―following the moon.‖ So the idea that let‘s say a five mega data center, has five mega generation, the idea that they could virtualize their load to some other data center in some other part of the world, even. Although technology‘s not quite there yet, this isn‘t practically done although people are thinking about it. And also contribute the load of their generators in order to flatten the load curve, that‘s a pretty interesting application.

Q&A: Risks of M&A

Davon Snipes (IBM): Hi, good morning I‘m Davon Snipes from IBM as well. I think we‘ve had a lot of discussion about the benefits of M&A activity. I was recently down in an engagement at Progress Energy and they‘re in the process of being acquired by Duke Energy. I‘d like to talk a little bit more about some of the risks and the cons to a lot of this M&A activity that we see in the market today. Rilck G. Noel (Verizon): At the investor-owned utility level? Davon Snipes (IBM): Both. Scott Henneberry (Schneider Electric): I‘ll throw one out, and that is, particularly coming from our perspective as one of the big multinationals, the risk is that you mess up the target so badly that everyone leaves. And you‘ve just completely destroyed whatever you put into it. And it‘s something you really have to work hard against. You really have to have a very conscious integration plan to make certain that you can retain the important people that are part of that. Jeff Renaud (EnerNOC): Yeah, I think people is the number one for us. Especially with the stage of companies we typically look at where these are companies that are still in the relatively early stage, relatively small, still driven by the original founding entrepreneurs in large measure, and so keeping those people motivated on the one hand after what‘s usually a nice paycheck in the transaction. Then culturally integrating them into a larger organization where they don‘t control every aspect of what happens is difficult. So you have to have a clear plan on how you‘re going to do that. That‘s the number one issue for us. Our targets view us as a large company whereas we are 100 to 1000x smaller than everyone else.



Page | 19

Mozhi Habibi (IBM): So I think you‘re absolutely right. One of the challenges is the fact that we‘re not just acquiring technology which is a huge part, but we‘re also acquiring the people. Gary and I were just talking about that a little while ago. Not stifling that, but at the same time being able to boost it and maybe put it on supercharge, is a huge challenge. Gary Rackliffe (ABB): I would point out, taking a step back, at some of the risks that we looked at while evaluating different acquisitions or investments in the market at a higher level. And that‘s the overall market risk, relative to smart grid, particularly when you get to distributed energy resources and you get into the residential customer space. Because there are certain assumptions that if you put a smart meter on a customer‘s home, they‘re going to get excited about that and they‘re going to want to Google their load every 15 minutes. That‘s pretty far from reality. So the issue is: exactly how is the market going to develop? I mean we follow all the market analysts, where AMI had a huge ramp up and we‘re seeing that now slow down a little bit. And now there‘s a big bump forecasted for distribution grid management because the utilities can control distribution grid management. It‘s within their domain. They can deliver the results, but part of those results are societal results. When you start driving reliability to end-use customers, that‘s a pretty tough business case for the utility who has to make the investment. They do get certain efficiencies. There‘s no question about that. They can reduce restoration time, reduce crew overtime, and all of that. But the real benefit of reliability goes to the end use customer. So now we‘re left with a regulatory environment which is what value do the public utility commissions put on the overall benefits of better utilization of our energy resources… reducing losses in terms of transmission and distribution, shaping customer loads so that we have a more levelized generation so we can avoid either building new generation or avoid using less efficient. So how you navigate that and move to a smarter grid largely depends upon, not so much FERC, as it does the individual state public utility commissions. And quite frankly we viewed that as a risk factor when we looked at making some of the investments that we‘re making in distribution automation because the cost we covered for that, for the utilities is going to be, I don‘t want to say uncertain, but we‘ve seen a lot of variability. Two ranked filings by one utility, two adjacent states where they do business: one state approved it and the other didn‘t. How do you forecast that when you‘re making a valuation of technologies and companies? The size of the company is an issue, as is the technology they‘re developing and how mature it is, and where they have deployed it and who their customers are? I mean those are things that regardless of which sector you‘re in, they would apply. But specifically with smart grid, is there going to be wide spread adoption? And I think a critical part of that is, is the regulatory position of the individual states. Mozhi Habibi (IBM): I agree with you, and especially in the smart grid world because there‘s so many standards that are just starting to actually be established. So knowing what standards are actually being approved, the US vs. Europe or Asia. So that‘s a huge issue. The other thing is remembering that we (the people in this room, in this industry) are not typical consumers. We may get excited about electric vehicles and these panels on our house, because this is what we live and breathe, but we‘re not typical. So just because, I‘m just picking EVs just because I own one, but just because we get excited about EVs it doesn‘t mean the rest of the country will. And keeping all of that, and trying to disengage yourself from the way you think consumers behave.



Page | 20

Rilck G. Noel (Verizon): I‘ll make one comment and then I‘ll provide two risks that I‘ve seen and they‘re real. We were talking about white space. Consumer education, in terms of benefit of smart grid, is an area that somebody should get into. The thing is, we speak the language and we get excited about things most people don‘t even know about. And I agree with Gary. If you‘re going to be successful in the residential sector, it has to be machine to machine. In terms of merger risk, you mentioned Progress Energy being acquired by Duke, it depends on how it‘s being announced. If it‘s being announced as a merger of equals then that results in all kinds of antennas and there‘s a risk there. When you acquire a company, you acquire them. You go in and you impose your way of doing business, good or bad. But it cannot be equivocal in terms of who the acquiree and who the acquirer. You can‘t let that happen or you get into real trouble. The second point Gary mentioned is your regulatory risk. You may go ahead and proceed and at the last minute the regulators may say, ―No, because we don‘t see the benefit to our consumers to have you acquire this particular company.‖ The example that comes to mind was about fifteen, sixteen years ago, if not longer, SoCal Edison tried to acquire San Diego Gas and Electric. $150 million later, the California PUC says it‘s not going to happen. So it didn‘t happen. So again, it‘s not a merger of equals, I‘m acquiring you and let‘s be clear about that, and the second one, the regulators can always throw a wrench in the machine and then everything is off. Scott Henneberry (Schneider Electric): One last point about risk, it‘s not the biggest risk, but what‘s interesting is that it‘s almost always the case that small companies don‘t have a good position on IP. And I don‘t mean internet protocol, I mean intellectual property. So I‘ve heard many, many, many entrepreneurs say, and it‘s very expensive obviously to do patent filings and to build up a portfolio, etc., and I‘ve heard lots of entrepreneurs say, ―Well, we‘re not going to disclose it and that‘s how we‘re going to protect our intellectual property.‖ It‘s only held by us, and that‘s just absolutely dead wrong. So the counsel I would give to the small companies, and I would hope that the bankers are checking this off when they‘re having the discussions, is to have a cogent IP strategy. Even if you don‘t have a lot of patents, at least have thought it through and have a well understood strategy that you can articulate in the discussions that come up. Mozhi Habibi (IBM): That‘s a very, very, very good point. I think we had one more question.

Q&A: The Residential Market and Consumer Engagement

David Manning (NY State Smart Grid Consortium): Just one quick point on PG&E’s difficulty, communication difficulty, if I could call it that. I don‘t know if you‘re watching the Governor of Maine trying to diffuse the smart grid initiatives in Maine. There‘s a huge communication gap. I wanted to pick up on what Gary was saying. When you talk within the same utility to different teams, one is looking for information flow back to the system operator for all those benefits. The other team is talking about information going to the consumer so they can Google their thermostat at night, and I don‘t disagree. Gary, you said earlier that when that home technology becomes automatic, that‘s when you‘re starting to achieve smart grid. That was an interesting point that you made. The struggle I‘m having is that within the regulatory world, you‘ve got to demonstrate some kind of consumer benefit. And I‘m a little bit worried that the regulators are falling behind on this, in part, because



Page | 21

that part of that piece isn‘t being communicated. If you could just carry on with that for just a moment in terms of engagement of the consumer both for the benefit of the consumer, but also for the benefit of the regulator. They love electric vehicles. Regulators are very enthused about electrical vehicles. They‘re probably ahead of the market in terms of anticipation of electric vehicles. That‘s kind of how you get their attention. I remember meeting with Stanley Moyer (of the IEEE Standards Association) several years ago in D.C. and mentioning smart grid, and he just took off. He talked about how they didn‘t have solar in the northeast, and they didn‘t have wind in the south, and all his guys wanted solar and wind. What he was really talking about was lack of transmission infrastructure in the U.S. To him, it was smart grid. When that was smart grid he loved it, and now smart grid is evolving and that old definition that everything smart grid is good has been challenged by some of these interruptions. I guess that‘s what I‘d like you to pursue here for just a moment. It‘s consumer engagement and how you get there. How do they get excited about all the innovative things that EnerNoc is doing? You‘re more consumer-focused than most, but everybody is here. And then my last piece, if Rilck could pick up again, I keep hearing that there‘s going to be a cybesecurity bill passed. One of the only bills that will be passed this year is cyber security, and I‘m just wondering who is working on that because Washington has a bad habit of imposing a lot of standards? And when you talk about risk, I think enthusiasm in D.C., which is rare at the moment. Gary Rackliffe (ABB): I just want to make a point of clarification. I didn‘t mean to imply that consumers would lose discretion over how they consume electricity. I just think that it needs to be easy for the consumer to be engaged so they can program their thermostat. They can determine what level of comfort they want in their home, for example. If you send a pricing signal and the customer has to actually go and lower the thermostat, you‘re going to get a much smaller impact as a result of that type of demand response programs. So that‘s what I meant by that. The challenge though is the technologies for some consumers are going to be relatively expensive versus the payback that they could potentially receive. There‘s always a backlash if such a program is not voluntary and becomes mandatory. That was one of the issues related to the Baltimore Gas & Electric program when that got delayed by the Public Utility Commission. So, I do agree that there is a challenge in consumer education. The average consumer may not even know that there is a variation in the price of electricity depending on whether it‘s peak or off-peak, and how they can use that to their benefit to make sure that they do get benefit if they opt in for real-time pricing or time-of-use rates. The education of the consumer is a huge challenge for us as an industry. There is some positive pilots that have been done. We‘re doing some work with Oklahoma Gas & Electric and they did a pilot in Normand, OK. Interestingly enough, it was an opt-in program. Voluntary. They did manage, and I think they had to recruit to achieve this, but they tried to get the demographics of the participants more or less the same as what their service territory was. Different income levels, different sizes of homes, etc. And what was interesting was that if they believe there is elasticity in the price of electricity that people will respond to higher prices when there‘s the education process and they are engaged in the program. Part of their program was the smart thermostat which gets a signal based on four different pricing tiers, and they could determine whether or not they would want to adjust the temperature in their residence based on the prices of electricity during a particular time. When they implemented the higher prices, they saw…you could see the charts reflect significant decreases in the consumption of electricity. So I think we can get there, but it‘s not…you can‘t take consumer engagement for granted which was, I guess, the point I was trying to make.



Page | 22

[Participant]: And just one more quick… Also, herd mentality. There are companies out there that are using psychology in terms of getting consumers to respond. Not only is it the absolute notion that you can save money, but the thought that perhaps you‘re spending 30% more than the individual next door. That‘s embarrassing. Yeah, OPOWER has done some really interesting work. Riaz Ladhabhoy (Bank of America Merrill Lynch): And they‘re signing up utilities quickly. I think the point is utilities shouldn‘t be the one…there‘s a real opportunity for start-ups here. Utilities shouldn‘t be the ones that are trying to learn about communicating with customers. I can‘t imagine a less transparent process; you get a bill with a dollar amount. Scott Henneberry (Schneider Electric): They‘re trying to communicate with rate payers. Riaz Ladhabhoy (Bank of America Merrill Lynch): Exactly. Mozhi Habibi (IBM): You brought up two points. 100%, I think we all agree consumer education needs to be out there. At IBM, we‘re doing a lot of different pilot projects. But we‘re doing one in the Pacific Northwest with a number of different utilities. We‘re doing one with EDF, mainly in the Bordeaux region of France. One in Brazil, and one up in Denmark. And all of those are small pilot projects that are opt-in projects in demand response energy management where a group of people all went in and explained the consumers. At the end, it actually showed consumers that they were saving a certain amount of dollars/euros per month on their electricity bill. And the minute that happened, they basically had an option when the program ended to opt-out. It, literally, was actually, you know how they have ―subscribe‖ or ―unsubscribe‖? It literally automated one extra step to actually re-subscribe. And over 90% of the ones in France re-subscribed. So they‘re all small, but I think it‘s a bit of a learning experience. In this project it was EDF, IBM, and a bunch of other entities that got involved. I think, little-by-little utilities are starting to see that they can call them rate-payers. There‘s a lot of different stuff from an IBM perspective that we‘re doing with utilities as well as companies like OPOWER and others to kind of do that process. The other thing you brought up was the bill. The cybersecurity bill. I don‘t know what everybody else is doing, but I can talk about it from an IBM perspective. One of my colleagues, actually, her sole responsibility is to kind of know what‘s going on from a regulatory perspective. U.S. as well as around the world. She focuses on some specific countries right now just because of the issues that are going on in those countries. So she‘s very much involved with lobbyists and all that stuff. In a lot of situations, like we did this…for Canada as well as U.S. as well as Brazil where IBM‘s ideas were solicited in development of bills and rules and regulations for the electric industry. So we were one of the people that did that. I just actually went through a project called, ―Smart Grid in Silicon Valley,‖ which was a support that was sponsored by the mayors of San Jose and San Francisco, PUC, and it involved a lot of different vendors. We basically were supposed to put a report together that is going to be presented in Sacramento that talks about the benefits of smart grid in Silicon Valley from a consumer perspective, from a jobs perspective, from an environmental perspective. From all of that. So there‘s different things from an IBM perspective that we‘re doing for regulation. I‘m not answering your question on the cybersecurity bill, but I think that gives you a regulatory perspective of what we‘re involved in. Jeff Renaud (EnerNOC): One last comment back to the consumer thing. EnerNoc does not serve the residential market. It‘s the only market we don‘t serve and that‘s on purpose because we think the



Page | 23

economics are really tough there. Personally, taking my EnerNoc hat off, my personal opinion is that I think it‘s a false construct to say the answer is just more consumer education. I think, to Gary‘s point, I think it doesn‘t work for consumers until you get to that next layer of technology beyond the meter and that question of who provides it? Who owns it? Who pays for it? So I think we‘re a long way off from the smart grid vision on the consumer side. I think it‘s going to take years. It‘s going to have to take the appliance technologies having that embedded and you get 10-15 year turnover on appliances and ultimately you have smart grid-enabled appliances in homes. It‘s going to be a long, hard slug. That‘s my personal opinion. And outside of an OPOWER who notably is doing most of what they do completely independently of any technology or smart grid AMI deployments or anything of a related nature, I‘d be skeptical of anything as an investor of anything on the residential side at this point.

[Participant]: There‘s been a lot of money raised though on that Home Area Network side. Jeff Renaud (EnerNOC): No doubt, but it was raised a couple years ago. [Participant]: I‘d be curious, as I think of ABB and Schneider as being on more of the utilities side from an M&A standpoint…are the big conglomerates moving in the direction of the home? Scott Henneberry (Schneider Electric): So we don‘t know how it‘s going to come about, and I think the reservations Jeff expressed are legitimate, whether it will be through utility or through naturally looking for ways to be energy efficient, for example. But we believe globally that residential energy management is going to become a very important marketplace. You may not associate Square D with Schneider, but Square D is a Schneider company so we have something like a third of all of the residential electrical distribution in the U.S., for example. My house has it and I didn‘t work for Schneider at the time. So we do participate there. We do think it‘s important. It is evolving. It‘s not there yet. The business model isn‘t clear. Who‘s going to own it? Who‘s going to sell it, etc.? But the opportunity for real energy savings and energy efficiency exists so we think that‘ll happen. Gary Rackliffe (ABB): I guess when we look at the residential portion of the market, we‘re picking and choosing. We invested in Ecotality which I think everybody‘s aware of their positioning in terms of smart vehicle charging. And we did that for two reasons. One: it ties into the work that we‘re doing in terms of the management from the utility side of distributed energy resources and how we can plug into Ecotality to manage the in-home vehicle charging without ABB having to address that solution. But also, we‘re very interested in the Level 3 charging stations that they will offer. So we had two motivations: one is how you manage charging stations and then also the actual power electronics. Level 1 and Level 2, I think everybody‘s aware that that‘s actually on the vehicle itself. So the charging stations Level 1 and Level 2 is a meter and some communication and basically a wall switch. I‘m strongly simplifying it, but the intelligence there is highly communicative in how you turn it on and off and schedule it. So we back up and we look at how you manage distributed energy resources. We‘re doing a lot at the industrial level. Energy efficiency at the industrial level is a very big component of our automation business. Any time you can apply a drive to a motor, typically those applications pay back within 2-3 years. It‘s kind of interesting because the whole emphasis on smart grid and energy efficiency and that component of it, the industrial sector and large components of the commercial sector have has a smart meter for, what, 15-20 years now. All the hype, if you will, around AMI and the implementation of smart meters… Probably over 50% of the consumption through the industrial and commercial sector is



Page | 24

already being metered through a smart meter. So I think there is a lot that we can do on the building management systems where there is a smart meter as well as the industrial sector in terms of improved automation, drive technology, and lowering energy consumption for those end uses. Scott Henneberry (Schneider Electric): It is a bit ironic, I‘d point out, and this is true throughout the world, that the residential customers have been subsidized by the big C&I customers in terms of their overall energy costs so that‘s precisely now the problems. There isn‘t so much money to save residentially that the investment doesn‘t pay back. So we‘re wasting energy, residential customers, because we‘re subsidizing the way that we are all over the globe. It‘s a real challenge for that reason. The regulators are either directly or indirectly hired/elected by the residential customers who are certainly not going to triple the rate that those guys pay in order to bring in the motivation to save money so it‘s a tough situation. Jesse Berst (Smartgridnews.com): I want to push back to Jeff on this whole residential side. I happened to have lunch with Terry Boston who runs PJM and he was saying he just wants access to the HVAC, electric water heater, and the EV. And he says he could do everything he wants just with those. And he doesn‘t care if the Nintendo‘s got a smart chip, or the George Forman Grill. He just wants those big three loads. I think there might be some damage to be done right there, perhaps. Mozhi Habibi (IBM): One of our clients, Enerpoint Energy, they basically told their customers…because they‘re implementing 1 million smart meters, they basically told their customers that if they sign up for their demand response program, they were going to get this really cool, spiffy home energy management system. They got tons of people that signed up for it. Now they basically have that. It goes back to both Jeff and Scott‘s comments. The market for it. Who is making money? Who will make money from it? What can you ultimately push through that system? Can you sell a, ―Hey, you‘re washer/dryer isn‘t efficient enough so come buy one from Sears,‖ What is the money-making scheme out of that? Rilck G. Noel (Verizon): A couple of comments. One, the first one is related to customer education. Last week, I met for about an hour and a half with the Chairman of the Michigan Public Commission, and again, customer education is key for him in terms of implementation of smart grid. They are organizing a 3-day symposium at the end of May and I‘m going to be speaking there. The point is, I‘ve met with all the members of Commissions and they are all in favor of consumer education, good or bad. Some of the lessons learned... In England, for example, they let some people know on the internet, on TV, how close they are to reaching peak level. It could be either green, yellow, or red, and without any incentive, people reduce their consumption by 3-4% and to me that‘s a good example of consumer education that did not cost a whole lot. And I don‘t know, Mozhi, as you are doing your work in Europe if you‘ve run across that, but the English model seems to work. And the last point I‘m making is regarding existing appliances. Again, a good idea for entrepreneurs, people have developed a device between the outlet and your appliance that pretty much transforms that appliance into a smart one. It is $29 and it‘s up to you to go and determine whether or not is cost effective and when you‘d get payback. If you plug it into the outlet and your George Forman Grill maybe it‘ll take 60 years to get your money back, but for your washing machine and larger appliances, you may get a much quicker payback.



Page | 25

Q&A: Partnership between Colocation Sites and Data Management

Jeanne Ziobro (Schneider Electric): A question on the amount of security and the data and your comment earlier about the IT companies. The IT companies do know data, and they know how to manage it? Security and threats are a concern. Do you think a possible partnership or M&A might exist between the colocation sites and the companies that do know how to manage data? I know you have to take regulation into consideration, but certainly utilities manage some data. They manage consumer data and the consumer energy data, but now we‘re talking about a whole lot more data. I see the need for data centers, many more data centers, coming around. I don‘t perceive a utility building one in their backyard. It just doesn‘t seem like something they‘re going to do. So is there an opportunity for partnerships with companies that have these colos sites and can manage multiple different companies from one facility. Do you think that‘s a partnership somewhere down the road? Rilck G. Noel (Verizon): Even today, we manage colo data centers for about 4500 companies. Some of them are utilities and some are not. That is definitely there today so there is an opportunity and we‘ve capitalized on it. The other thing is, today, a lot of utilities have received approval from regulators to build data centers. They are moving forward. But I think, and again that‘s my estimation and that of some of my colleagues and people we‘ve hired to look at the market for it, I think that‘s the last wave of data centers being built by utilities. As the Cloud becomes more and more prevalent, I think we‘re going to have a shift from utilities building their own data centers to having somebody else do it. This way they are guarded against technology obsolescence and scalability is also an issue that they keep bringing up so that we also guard them against that. These are two of the advantages that I see. So, you mentioned that there is an opportunity. It is already present. There is a wave of data centers that are being built today, but I don‘t think that within the next 3-5 years we will be seeing a lot of data centers being built by utilities. And the Cloud is here to say. Mozhi Habibi (IBM): Yeah, I agree and I think from an IBM perspective, we have data centers that we manage. We do see partnership as well as M&A activity in that area, and like you said, we‘re pretty active in virtualization of data centers. So data centers in the cloud for utilities…especially because there‘s scalability and all that stuff. There‘s security, there‘s reliability, and there‘s also this concept of… Cloud was being positioned as always more of a position of an IT cost reduction. It is that for sure, but there is another piece of Cloud now as a way of being able to solve business problems. On the data management and storage side, we kind of see it that because there are so many different people or silos in a utility that are going to access that data that Cloud will help utilities with being able to manage a cost structure. Because it has a scaling of who is basically charging and how much per day does that data have to be provisioned over a certain amount of time versus just building a huge brick and mortar place and having to manage all that data.

Q&A: Methods for Evaluating Companies from the Banking Perspective

Kevin Moran (Schneider Electric): I have a question. Riaz, this is for you maybe, from your perspective. Scott mentioned an evaluation of companies you‘re working with. I mean, he‘s looking at IPs as one example as a way to evaluate a company. I‘m familiar with seeing a wall of patent applications when applying for a company. What kind of methods do you use when you‘re evaluating a company you‘re working with?



Page | 26

Riaz Ladhabhoy (Bank of America Merrill Lynch): Maybe I‘ll start with the private side. Generally, there are different forms of multiples. So either LTM revenues or NTM revenues, so last 12 months, or forward-looking revenues as companies are moving into profitability. Those multiples become important so that‘s definitely one way to look at the comparisons. There‘s been plenty of M&A activity so there are some precedent transactions over there. Many of them have been between public companies and private companies so there‘s not a tremendous amount of data in terms of multiple data coming out of there. There are companies that trade in the public market so you can look to those as guideposts. That‘s one way to start thinking about valuation. Another way is that in many cases there are very specific and unique synergies between these two companies and so they‘re going to view it in a different way. There going to be able to, arguably, change the company‘s model through their sale channels when they buy them. And then, bankers use things like DCF and other analysis to look at them, but I think that‘s kind of a way to start on the private side. On the public side, it‘s good and bad to have a public comp. Itron, for insistence, on the meter side has been public for quite awhile. Elster went public last year. Meter company, they‘re very different companies, but they did similar things. Water, gas and electric meters, and they were in AMI. Again, good or bad, the valuation of the company wasn‘t going to be much different than what Itron traded as. As we get more and more public companies with more public valuations out there, we‘ll be able to have a little bit more sophisticated view of valuation. Kevin Moran (Schneider Electric): So more of the hindrances on the smart grid side? That there isn‘t enough exposure or data out there that would determine how it‘s going to perform 5 years down the road? Riaz Ladhabhoy (Bank of America Merrill Lynch): Somewhat, yeah. I think there‘s really not that many pure play outside of EnerNoc, Comverge, and some of the metering companies. There‘s not a lot of pure play smart grid companies. It‘ll happen. The markets will evolve, but right now that is one of the obstacles to determining valuation.

Q&A: When Will We See Public Exits?

Kevin Moran (Schneider Electric): To follow up on that, when do you see that happening? How far down the road do you think it will be where do you do start to have some public exits for smart grid companies? And in what specific areas outside EnerNoc and the metering companies do you see that that will happen? Riaz Ladhabhoy (Bank of America Merrill Lynch): If Gary and Scott would stop buying up all the companies… I think that it‘s getting closer and closer. I think there will probably be some AMI companies that are now getting mature enough to get public. I think that will be a very interesting aspect and group of companies. I think also on the data management side, you‘re going to see very sophisticated software companies that are involved in the data management analytics. I think there‘s a slew of them that I know that are really interesting. That‘s another set of companies. We talked about companies that deal with Home Automated Network as well as consumer behaviors. The OPOWERs of the world. Companies like Tendril is another company that was mentioned earlier. That‘s another group of companies. There are many coming. They are getting bigger and bigger as we get more deployments of AMI and we get more



Page | 27

real traction with other parts of smart grid, there will be groups of companies coming public. And I am confident that we will see more and more IPOs starting. Scott Henneberry (Schneider Electric): There‘s clearly a critical mass, right? It‘s very difficult to imagine a company with revenues less than $100-150 million dollars going public. So they have to get that growth in order to come even close to thinking about it. Riaz Ladhabhoy (Bank of America Merrill Lynch): And we‘re seeing more companies get to those levels that Scott mentioned. Once you get one very successful deal, obviously, then all the other companies talk or call you up. Mozhi Habibi (IBM): Yeah, I totally agree with you. I think that‘s key to remember for IPOs. You have to hit a certain revenue and there‘s a lot of companies out there in the past 2-3 years that got a lot of press. A lot of press. But you have to remember that a lot of these things happen because every single company came out with a stimulus package, money. Which means that every single company came out with ―pilot projects‖ whether it was the Silver Spring Networks or the Tendrils or any of these companies that got a lot of press, a lot of media and analysts writing about them, there was a big push because there was ready money. But a lot of that were pilot projects. They weren‘t full productions, and a lot of it was also that lowest-hanging fruit stuff. When everybody talked about AMI, they thought that was smart grid, right? So now we‘re getting to the point where that‘s calming down a bit, and the companies that got a lot of press are trying to move their pilot projects into an actual production. Then you get a better idea of what the revenue is, and when they hit that certain level, you can seriously start to think about IPOs because now they‘ve got that first 12 months revenue. Riaz Ladhabhoy (Bank of America Merrill Lynch): You can‘t get public on pilot project revenue.

Q&A: Structure of Utilities

Dr. Kannan Tinnium (GE Global Research): Some of the challenges, or questions, that we still have as we talk about smart grid technologies are about the structure of the utilities. Some are working. Some you have ISOs. And when we talk about smart grid, we talk about the entire system. The question is: some of the technologies that I present to ISOs, they may not have control over devices because they are not meant to control them. For example if ISOs had to control generation, saying that, ―Hey, you‘re going to become unstable very soon,‖ can they go out and control that generation? Maybe not. So the question to the panel is: what type of structures do you think would be needed or would benefit for isolated implementation of technologies that are more utility oriented? Scott Henneberry (Schneider Electric): So, I‘ll take a stab at it. It‘s a complex question. If we‘re talking about the U.S., I think the market structures that exist in the territories with Independent System Operators (ISOs) etc. are really much more conducive to developing smart grid technologies because there‘s an open market and that‘s where the aggregators are able to play etc. etc. There are other parts of the world, however, that I would give the opposite answer. The point about China earlier was a really good one. They don‘t spend a whole lot of time debating after a 3-5 year plan comes out. They just go do it. And it‘s really impressive to see. When you go there, once a decision is made, that is something. So I think



Page | 28

it‘s complex. It has different answers in different geographies. I generally favor a more open market. Let the market decide and cause innovation in small companies to respond to that. Mozhi Habibi (IBM): I totally agree. I think it‘s just that we have to remember that it is different markets. One recipe doesn‘t work from state to state, let alone every country. As far as I‘m concerned, I look at the U.S. as 50 different countries. Sometimes even more. We have to remember that, but at the same time, there‘s a lot of lessons learned. We can learn a lot from other places and not repeat mistakes, but at the same time be able to utilize some of the things. No reason to reinvent the wheel every single time. But it is a very complex question. If you have an answer, I‘d love to talk to you about it. Kannan Tinnium (GE Global Research): I don‘t have a straightforward answer. But I just thought I could add one more point. I spent a significant amount of time working in India. That‘s where I come from. There, the concept of smart grid is different. Just to bring up one point that did not come up in today‘s discussion but is very critical for India is the power loss. They‘re saying, ―Hey, what are some technologies that can help me reduce the loss of power. Scott Henneberry (Schneider Electric): It‘s more than that, right? The Indian government has now put a lot of money forward to any of the provincial utilities towards the reduction of non-technical losses. If they can achieve…I think if they can get less than 15%, then they get to keep that money. If not, then it becomes a loan. So you‘re right, it‘s an absolutely different look at what the smart grid is versus other parts of the globe. Mozhi Habibi (IBM): It‘s a depth of electricity and also the actual wires. So you‘re absolutely right. Talk about a whole different world of what they consider smart grid. Kannan Tinnium (GE Global Research): And also the concept of microgrids because all the loads are totally scattered and people don‘t have access to reliable electricity so microgrids are another technology… Mozhi Habibi (IBM): It‘s interesting, so when you go all the way to, basically, the workforce. We‘ve talked about workforce efficiency and workforce management and all that stuff. I was at an event in Bharain and it was all these Middle Eastern companies so it was kind of interesting because they were like, ―Workforce efficiency? What‘s that?‖ That wasn‘t their requirement. They wanted to talk about workforce management. And to them, workforce management was…this guy from a utility turned around and said, ―All these people come and then we give them the stuff they‘re supposed to do, and then they go and find a piece of shade. And they sit there all day and smoke their cigarettes. And I need to know what the heck it is they‘re doing all day long.‖ That was workforce management. We were talking about workforce efficiency, carbon footprint, and here the focus was simply getting the workers to work. So, different concepts of Smart Grid in different areas of the globe, different worlds essentially on many levels. I want to thank you all and thank you to the panel.

full report: smart grid: strategic partnerships and m&a · full report: smart grid: strategic...

Documents