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The New Venture Capitalists: Utilities Go Shopping for Deals

How gas supply and price disruptions now outweigh Big earnings potential plus an energy-related focus are prerequisites when AEP and Cinergy sort through investment projects.
Fortnightly Magazine - December 2000

Walborn is a stake in PHPK, a Columbus, Ohio-based cryogenics company. AEP saw PHPK as a key player in the support of superconductivity applications—a rapidly growing industry niche in a market hungry for innovative technologies. After establishing that PHPK met its three primary criteria, AEP bit. In the six months since the utility's investment, PHPK has nearly doubled its business. Walborn attributes much of that growth to the AEP name; indeed, buy-in by a large and respected corporation is an instant endorsement of PHPK's technology and capabilities. The partnership has helped open up new business opportunities for PHPK that already have brought measurable results.

Just as companies like AEP are looking for the next home run, the reverse is happening as well. Small, energy-related technology companies are finding that utilities are flush with cash and other attractive qualities that make them preferred investors. Thermal Energy International Inc. of Ottawa, Canada, is a prime example. A provider of heat recovery and emissions control systems, the company recently earned a U.S. patent for its NOx control technology, THERMALONOx. Thermal has a portfolio of developing products and ideas for electric generators, but has not fully commercialized their potential. (It would be categorized as an expansion-stage company, according to Walborn's definition).

Executives at Thermal realize that the United States is a prime market for its technology, which, they say, will be substantially cheaper than competing technologies. Initial interest in the company's products has been high, but given the long sales cycle for its multimillion-dollar systems, marketing is costly. To successfully approach the U.S. market and overcome associated costs, Thermal is seeking capital from a number of sources, including offering various risk-and-reward opportunities to utilities and independent power producers interested in being early adopters of THERMALONOx. These could be attractive opportunities given current compliance pressure and questions about the ability of suppliers of existing technologies to meet demand for NOx compliance solutions.

Thermal Energy president and CEO Tom Hinke emphasizes his preference that the benefactor be a utility in the United States, the company's primary market. In addition to the cash that Thermal needs for its expansion, there is great potential value in the right partner's guidance, experience, and U.S. market savvy, he realizes. Additionally, Hinke points out that the new investor likely would be a key customer itself.

What Hinke offers in many ways is what U.S. utility venture capitalists are looking for: innovative technologies to serve the power markets, strong market potential, and the potential for off-the-chart earnings. According to Hinke, Thermal is in the process of negotiating with several U.S. companies for the expansion capital it needs.

The E-Business Venture: A Booming Niche

Certainly, the potential of the e-business frontier is not lost on the utility players. Utility B2B e-commerce will account for 17 percent of the industry's transactions, growing from $30 billion in 2000 to over $266 billion in 2004 (Source: Forrester Research Inc.). One company poised to take advantage of that e-business potential in the energy sector is Cinergy Corp. Kevin Kushman and Brian Stallman are managing directors of Cinergy Ventures LLP,