COVER STORY

The Short Story of Liberty Power
By Carlos Alfaro

"LP – On our way to 1B” reads the engraving on the managing team’s iPods. Last Christmas, the Liberty Power Corporation execs exchanged the high-tech music boxes to celebrate, not only their success, but how far they plan to go. The “1B” stands for the $1 billion the company is hoping to gross revenue in the next few years.

At the end of 2005, Liberty then in its fourth year produced revenues in excess of $100 million by selling electric power. Now, as then the company’s vision remains clear: emerge as the preferred provider of low cost, reliable electricity in the nation. After reaching the $1 million dollar milestone, the company that began selling power door to door in New York in 2002 is getting ready to grow, raise capital and turn their vision into a reality.

Liberty Power CEO David Hernandez his brother, Chief Relationship Offi cer Eliezer Hernandez and COO Alberto Daire have led the company in its short history from 4 to 34 employees. Liberty Power is still in its infancy compared to the huge, Wall Street-backed companies competing in the $300 billion energy sector. They remain a new player with the right kind of energy to reach their goals, and on course to reach the $2 billion mark, twice as much as the figure presently engraved on their iPods.

IN THE BELLY OF THE BEAST

After graduating from business school, and considering several job offers, Cubanborn David Hernandez accepted a position at a Texas energy company he knew little about: Enron. Hernandez already had a background in telecommunications, formed during the1990s, while the industry was adapting to deregulation. Having come from Cuba, a country whose economy was a stranger to competition, he placed a lot of value on open markets and he bought into Enron’s vision, seeing an opportunity for young professionals to go into the sector.

Hernandez handled power plant development in Latin America, subsequently moving to wholesale trading and retail before he was laid off due to Enron’s infamous crisis.

“Aside from the shenanigans that took place,” Hernandez acknowledges that Enron’s “beginnings were well intended.” He elaborates: “They brought deregulation to the gas sector and brought down prices significantly, saving consumers billions and billions of dollars.” But as the company grew at an accelerated pace, he says, management interests diverged from the interests of the shareholders. There were other failures, too, according to Hernandez. Enormous growth came at the expense of taking on too much debt, for example. And the company also failed to take a realistic view of future power markets. Finally, there was the California energy crisis and the slowing down of deregulation, Hernandez remembers.

The end of Enron came abruptly, but by then, David and a colleague had already been working on a business plan for several months.

After leaving the troubled company, Hernandez entered execution mode and his business plan was put into action. In 2002 after his friend Alberto Daire and his brother Eliezer joined Liberty Power, the company began selling lectricity in New York. Sales teams were hired to go door to door in search of new customers and call centers were used to do the same over the phone.

A couple hundred customers eagerly signed contracts with Liberty to benefit from savings that, at that time, were close to 40 percent. Three years later, the business had taken off, and Hernandez, Daire and Eliezer were already looking at Texas, their home state, and the next recently deregulated market.

They chose to wait a year after Texas’s deregulation instead of entering the market immediately to avoid the glitches that often emerge as the utilities adapt to the new business conditions. “Anytime there’s a market opening, there are disruptions. In hindsight it was a good decision not to go into Texas right after,because they had major billing problems at the grid level, which we were able to sidestep by not being in that market early on.” Liberty Power entered the Texas market in 2003 after the dust had settled.

DEREGULATION: UNLEASHING LIBERTY’S POWER

The electricity energy sector is divided primarily between wholesale business and retail business. Companies in wholesale sell electricity from their power plants in bulk to companies like Liberty Power that have a base of customers. The retail business is Liberty’s focus: the distribution, delivery and supply of electricity. In most states, deregulation aims to eliminate monopolies by forcing utilities to choose one side of the business, as opposed to controlling both sides.

In 1989, the Federal Energy Regulatory Commission certified the first power marketing company. Since then, growth of the wholesale marketing business has been stunning: in 1994, nine firms resold 7.2 million megawatt-hours of electricity to retailers; a year later, 40 marketers sold 26.6 million. Big players such as Enron emerged during this period. In total, 17 states, representing more than half of the U.S. population, have deregulated.

THE POWER MARKETING BUSINESS

Despite deregulation, reselling electric power or “power marketing” is a tough business, according to Kennedy Maize, editor of industry publication Electricity Daily. According to Maize power marketers “have found their market primarily in commercial customers.” With the exception of Texas, Maize maintains that the residential side of that business hasn’t worked. “The bigger the customer, the more likely they will save,” he says.

In an increasingly competitive industry, power marketers play an important role. In the past, customers paid rates that reflected the fluctuating costs of supplying electricity at different times of the day. When demand for power is high, such as in the late afternoon on a sweltering hot day, utilities need to operate small socalled “peaking units” that often are more expensive to operate than the big coal or nuclear “base-load” units that run 24 hours per day. The higher cost is reflected in a higher rate. Power marketers help aggregate power from many sources, and they take advantage of price disparities among their suppliers to offer better prices to customers. They also enter into various financial relationships between buyers and sellers that help reduce overall risk brought by fluctuations in the market; it also enables them to lock in the rates they offer to customers.

So far, Liberty has entered the market in New York, Texas, Maryland and Washington, D.C., but the company wants to grow in other markets and is studying alternatives. According to Hernandez, there is a clear process by which they decide on a market entry. Liberty execs determine if there is a value proposition for them as well as the customer, if there are customers in the market who are paying too much for their electricity. If Liberty finds it can save customers money, or give them a fixed, locked price in volatile markets for some years in advance, not having to worry about hurricanes and other unforeseen events that moderate the prices of energy, then “it’s basically an insurance policy on energy,” Hernandez explains.

HEDGING STRATEGIES

As electricity becomes more of a commodity, like natural gas, it can be bought and sold at wholesale spot markets at a few locations in the United States. To make the markets work properly, sufficient information about prices and availability are provided to purchasers and printed in daily publications. Futures contracts that set a price on the future value of electricity are traded.

These complex financial strategies allow power marketers and brokers to hedge against future price fluctuations of electricity, thus providing more stable prices over the long run. By keeping their overhead lower in comparison to the utilities, power marketers are able to pass on the savings to the customers. “If you are a better manager of supply risk—prices at which you buy electricity—you also stand the opportunity to profit,” Hernandez explains. A group within the company studies and analyzes the electricity and power markets to make such decisions.

A UNIQUE COMPANY

“There’s nobody doing what Liberty Power does at the multistate level,” explains Paul Ring, Washington editor of the industry publication Restructuring Today. “They’re probably the only firm that targets the small niche market of companies that consume less than 1MW.” As a small company, Liberty Power can be more cost competitive and be more in touch with their customers. They are also the only Hispanic-owned retailer of electricity with a national presence, something they have successfully utilized in their favor as large corporations increasingly create diversity supplier programs that open business opportunities to minority-owned businesses. Among the customers that Liberty Power supplies are government agencies such as the U.S. Department of Defense, the Department of Homeland Security, and the Social Security Administration. Some of their business customers include New York Life, JCPenney, Linens ’N Things, Circuit City, CVS Pharmacy, Auto Zone, and Lowe’s. Managing the growth of the company as well as signing up Fortune 500 companies as customers are among their main priorities for the upcoming months.

THE TEAM

Growth is a key concern for the management team but they understand that they will only grow at the rate that they’re able to bring talented people to their team. New candidates are interviewed by David. Eliezer and Alberto, and the three of them have a clear idea of the type of individuals they are looking for. They describe the key requirements for members of the Liberty Power team as people who are “humble, hungry and smart,” a very simple rule that they have followed every time they have hired employees. The young company is slowly shaping its corporate culture. Their Fort Lauderdale, FL offices enjoy an entrepreneurial atmosphere where formalities are overlooked in favor of a more relaxed environment reminiscent of the Internet boom. The methodical employee selection process has yielded a highly motivated team mainly composed of energetic Hispanics who are frequently at their offices after hours and on the weekends. Their recruiting process does not deliberately seek to build a Hispanic majority inside the company, however because of the nature of their own networks of people as well as the networks of other members of the team, many new applicants just happen to be of Hispanic descent, explains David. Independently of the composition of their team, Hernandez wants to create and stimulate “a marketplace for ideas” and provide a culture that is open to them.

The book The Platinum Rule by marketing guru and corporate motivational speaker Tony Alessandra brought another component to Liberty Power’s corporate culture. The book, which defines four main types of personalities that can be identified on every person, aims to enrich the collaborative processes in teams of people and develop good interpersonal communications. It is easy to understand three of the four personality types that the book describes by looking at the leadership team; David is a “director,” Alberto a “relator” and Eliezer a “socializer.” Despite being on different ends of the theory, their communication is smooth. According to COO Alberto Daire, applying the theory of the book has helped them to communicate within the company and Eliezer Hernandez makes sure that the test is given to every new candidate who wants to become a member of the Liberty Power team.

As a “director,” David Hernandez is the right man for his position in the company. “Directors” are guarded and direct. They exhibit firmness in their relationships with others, are oriented toward productivity and goals, and are concerned with bottom-line results. David and his coworkers are aware of the advantages and shortfalls of his personality and respond accordingly.

Eliezer, David’s brother, is energetic, outspoken and extroverted and very easy to approach. According to the book, “socializers” have high directness and openness; they exhibit characteristics such as animation, intuitiveness and liveliness. Eliezer is an unlimited source of newideas for the company and a strong influence in shaping their corporate ideology.

Perhaps Alberto’s main advantage as a “relater” is his capacity to act as a bridge to bring the team together. “Relaters” are reliable and are more comfortable with safe choices. Alberto is part of the team that studies the industry and takes the decisions to manage risk.

EMPLOYEE SATISFACTION

To measure where the company stands in terms of employee benefits and satisfaction, Liberty Power benchmarks America’s best companies to work for; companies that have more than 1,000 employees and have been around for more than seven years. According to David, only 14 percent of those companies pay for full healthcare while they make sure to pay 100 percent of healthcare coverage. “The success we’ve had has been primarily due to the people that we’ve managed to bring on board,” David emphasizes. “Your business growth is limited to the people that you bring in.”

PHILANTHROPY

In January 2004, Liberty Power created the Liberty Power Foundation to support the advancement of education in the communities where their customers live and work. The foundation is a tax-exempt charitable organization that is funded through the generosity of their customers and through Liberty Power Corp.

The foundation sponsors and promotes existing nonprofit programs that encourage the interest of children and young adults in math and science. Any such program that exists in the District of Columbia, New York, Maryland or Texas is encouraged to contact the Liberty Power Foundation to apply for sponsorship.

Education is very important for David Hernandez. He was the first in his family to graduate from college and he has always understood its importance. “It’s not only important to do well; philosophically, I believe that it’s important to do good. For this reason, we started the Liberty Power foundation that funds children’s education programs for disadvantaged kids in the communities that we serve.” As the company continues to grow, Liberty Power plans to channel more resources into the foundation.

THE FUTURE, FINANCING AND IPO

One of the main challenges that lies ahead for Liberty Power, David recognizes, is that “growth is always a challenge, especially for small and medium-sized businesses, decisions have to be quicker and nimble.”

For 2006, the management team of Liberty Power will focus on bringing in the right people to the company and growing. Bringing in investors is another area they will focus on, says Hernandez. “This is a very capital-intensive business and so you have to have a low cost and efficient capital structure between equity and debt that you can handle given the stage of development you’re in.”

When asked about the possibility of an IPO, Hernandez says they will try to remain a private company for the short term but admits that they will be reassessing the possibility in the medium term. As an industry analyst, Paul follows Liberty Power closely. “If they wanted investors right now, I think Liberty Power would be very interesting to them,” says Paul Ring, editor of Restructuring Today.

They’re in the process of evaluating the purchase of a coal or gas power plant, which would take the company to a whole new segment of the market. “We think that anything between $50 and $100 million of equity will help us secure our first power plant,” Hernandez says.

“Electricity represents a significant portion of our bills, and as a community, we are very entrepreneurial. Between Hispanics and other minorities, we represent more than 30 percent of the electricity consumption in the country, and yet we represent only just about 1 percent of ownership in the energy sector.”


What Investors Look For
In his pursuit for new investors, David Hernandez keeps in mind the five main qualities investors seek:

1. Whether it’s an equity source or a debt source, they always look at the MANAGEMENT TEAM and see who’s on the team and who’s driving the organization, who’s making decisions. They like to see the chemistry between the people, they like to see the backgrounds and how relevant and transferable their skill-sets are.

2. They look for some TRACTION, whether it’s revenue that is already in the bag or if they see that there’s a mayor customer that signed recently, some history, etc...

3. They like to see that you make GOOD DECISIONS, on your pricing, the way you position your product and obviously they like to see the financials to make sure that not only are you growing, but you’re growing profitably and that you’re watching your expenses.

4. Investors want to see if there is any COLLATERAL to be had, its quality in case anything goes wrong.

5. The company shouldn’t have all its eggs in one basket; customer concentration not in such a way that the whole business depends on one customer. They also want to know that your customers VALUE the company.