IssueAlert Emerging Technologies ~ December, 2003

[News Item from PRNewswire-FirstCall] - DALLAS, - Alliance Data Systems Corp. (NYSE: ADS), a leading provider of transaction services, credit services and marketing services, today announced that it has acquired Orcom, a premier provider of customer care and billing services to electric, gas, water, and waste water utilities in North America. Orcom has operations in Colorado, Nebraska, Oregon and Pennsylvania, with approximately 400 employees serving a number of utility clients, and generating more than 1 million statements per month. Orcom is expected to generate core revenue of at least $30 million per year.

Analysis:
Alliance Data continues to acquire as it begins to execute on an organic sales strategy. Recently Alliance Data won an outsourced customer care deal with the Orlando Utilities Commission (OUC), signaling its first step into the U.S. municipal market. Now the company is acquiring North America's largest outsourcer of customer care in that market segment, Orcom.

Municipal Interest in Outsourcing Increasing
In the most recent UtiliPoint multi-client survey completed in February of this year, approximately 48 percent of 304 utility respondents in Canada and the U.S. indicated that they have either outsourced a function, or that they were planning to outsource one in the next two years. This was higher than expected, since data from the previous year indicated only 28 percent were considering outsourcing a function of customer care.

Analyzing this same information by company type reveals that municipal interest in outsourcing has grown at a higher rate than that of the investor-owned community.

Included in the municipal market are the water utilities, which are also beginning to upgrade their infrastructures. Earlier this summer I spoke at the New Jersey Utilities Association annual conference in Absecon, NJ. According to Consumers New Jersey Water President & CEO Sharon E. Schulman, “Current rate-making practices act as an impediment to water's ability to rebuild its infrastructure. Water companies offer unique growth opportunities because they are extremely capital intensive. They need capital investment to pay for water main replacement and rehabilitation, transmission and distribution and water treatment.” Schulman also made the following positive measure recommendations:

• Allow companies to charge full cost of service
• Targeted Revitalization Infrastructure Program will allow for proactive infrastructure improvements
• Offer incentives for investment
• Enhance loan programs so funds will be replenished and reused
• Educate the public about the need to rehabilitate the infrastructure to keep the water flowing and clean
• In the same UtiliPoint survey performed earlier this year, 2.2% of the water utilities in North

America is in the market to replace their CIS in 2002. That compares to 9.5% this year, a dramatic increase in activity.

Orcom has strategically targeted the water utility market with a version of its outsourced CIS called E-CIS Blue.

Orcom
According to the Orcom website, the company puts an emphasis on increasing profitability, reducing enterprise costs, improving business processes, increasing efficiency and elevating customer service levels via customer care outsourcing at the utility. The company strategically targets utilities that serve 50,000 to 1.5 million customers.

If we reverse the clock almost four years, one will find Orcom getting acquired by a newly formed limited liability company known as LiveWire Utilities. Livewire was originally organized by Steven Price and Stuart Rosenstein. Its principal outside investors were affiliates of the Thomas H. Lee Company, The Blackstone Group, EnerTech Capital Partners, Waller-Sutton Media Partners, and Mellon Ventures. The majority shareholders were Thomas H. Lee Company and The Blackstone Group. Those two were the more involved parties in the sale to Alliance Data. Since some venture funds have a 3-5 year window for an appropriate exit strategy, this was most likely time for those parties to sell Orcom.

In October of 2002, Orcom announced it would co-develop a next-generation customer information system (CIS) solution for North American utilities with Soluziona. The joint effort would leverage the combination of Soluziona's expertise in delivering CIS software to 44 utilities around the world serving more than 66 million end-use consumers, and Orcom's North American client base and 25 years of business process management expertise. Both companies would maintain development resources in Philadelphia. Soluziona will be using its North American arm, Soluziona USA, to manage development operations. The joint effort would come to be known as VIOS, which Orcom announced at the CIS Conference in Nashville this last June. Alliance Data plans to use the next 90 days to evaluate VIOS as a potential new platform for assisting in its goal of gaining operational efficiencies for its utility clients.

Yesterday I spoke with Orcom President and CEO Jamie Biddle regarding the sale of his company to Alliance Data. Biddle noted that the customer care outsourcing business for utilities is quickly becoming a business of scale and putting Alliance Data and Orcom together is a good thing from that perspective. "I really believe that this will present a tremendous opportunity for everyone involved - the size and breadth of the combined companies will provide enormous economies of scale, allowing for even greater efficiencies and expanded services. Alliance now has the capability to offer a compelling value proposition to multiple types of utilities, from municipalities to large IOU's," Biddle explained.

Alliance Data
Based in Dallas, Alliance Data bills itself as a leading provider of transaction services, credit services and marketing services. The company assists retail, petroleum, utility and financial services clients in managing the critical interactions between them and its customers. Alliance Data manages over 72 million consumer relationships for some of North America's most recognizable companies and operates and markets the largest coalition loyalty program in Canada. The company employs approximately 6,500 associates at more than 20 locations in the United States and Canada.

Looking at the utility services business unit of Alliance Data, it provides outsourced customer care and transaction services to clients in the utility industry, some of which are regulated entities and some of which are unregulated entities. Yesterday I spoke with Mike Beltz, President of Utility Services at Alliance Data concerning the acquisition of Orcom. Beltz reaffirmed the Alliance Data strategic direction of focusing on utilities. Alliance Data is putting a strategic focus on the growth of the Utility Services business unit which has been communicated to Wall Street as one of its three company growth engines. It has seen double-digit growth in the past three years and has prospects that lead it to believe that it can continue the growth.

Alliance Data has shown extraordinary growth in a sluggish economy over the past three years. Some key financial metrics include:

The acquisition of Orcom will bring annualized revenues for the Alliance Data utility services group to approximately $140-145 million.

Alliance Data has been executing a “roll-up” strategy by acquiring outsourcers in the North American utility sector for some time now. Recent acquisitions include:

2001: UtiliPro acquisition
2001: ConneXt acquisition
2002: Enlogix acquisition
2003: AEP Texas Retail back-office acquisition
2003: Exolink acquisition
2003: CBSI sub-metering acquisition
2003: Orcom acquisition

In my opinion, Alliance Data has demonstrated an ability to integrate these various organizations and related back office processes, while gaining efficiencies and lowering operating costs leading to successful revenue and EBITA. These acquisitions coupled with a strengthening organic sales strategy have quickly catapulted Alliance Data to a scaled market leader in North America.

Speaking specifically on the Orcom acquisition, Beltz noted, "we are obviously delighted with this acquisition, and the 3 key strategic objectives met are:

• A team of highly skilled utility IT, billing and customer care experts
• An established foot hold and improved presence and capability in the municipal marketplace
• Adding a portfolio of over 25 of North America's most respected electricity, gas and water utilities

Alliance Data plans to leverage these new clients and skill-sets to continue to grow our business."

UtiliPoint's Emerging Technologies IssueAlert articles are compiled based on the independent analysis of UtiliPoint consultants, researchers, and analysts. The opinions expressed in UtiliPoint's Emerging Technologies IssueAlert articles are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its Emerging Technologies IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues.

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