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LODESTAR
www.lodestarcorp.com

LODESTAR Corp., a leading provider of e-Business software to enable customer choice in the new energy economy, announced that it has received a $29 million investment from OCM/GFI Power Opportunities Fund, L.P. (GFI). LODESTAR is using a portion of the investment funds to repurchase shares, and the balance to accelerate the growth of its business. Specifically, LODESTAR will use the funds to enhance its solutions offers and global business opportunities.

Analysis: LODESTAR has established a name for itself in the energy industry by providing the software solutions that energy companies need to support billing services for their commercial and industrial customers. With this funding from GFI, LODESTAR plans to accelerate the development of new products and services included in its Customer Choice Suite, which provides flexible and scalable billing software solutions for energy market participants. LODESTAR markets its software solutions primarily to retail companies, distribution companies and independent system operators (ISOs).

LODESTAR achieved some significant growth over the course of 2000, including expansion into Texas and Europe. The company opened a new office in Houston to work with existing and new customers in the state, where its focus will be on co-developing software solutions and supporting customer-related operations—from customer acquisition to data management and billing. Within Texas, LODESTAR has already been working with clients such as Enron, Reliant and the Electric Reliability Council of Texas (ERCOT), which administers the Lone Star State's power grid and serves approximately 85 percent of its electric load.

However, LODESTAR perhaps found its greatest success in Georgia, where it secured the contract to work with Shell Energy Services, which is a leading gas marketer in the state with over 300,000 customers. Shell Energy Services is actually based in Houston, so this contract is perhaps what has offered fuller opportunities for LODESTAR to expand in Texas now that electric deregulation is unfolding there.

Shell Energy chose LODESTAR because it needed a better customer information system (CIS) that would allow it to expand quickly from its various market segments—residential, small commercial and small industrial accounts. Each business segment poses a different range of rate setting and billing requirements, calling for a different configuration of back-office capabilities. Understanding metering information (load profiling) is critically important for energy companies so that they can analyze customer behavior and energy usage across various company operations in order to procure the proper load and minimize imbalances. It is usually easier and more cost-effective for an energy company to purchase this function from a company like LODESTAR as opposed to building its own system with in-house programmers. LODESTAR markets its software as a Customer Choice Suite, offering such functions as customer acquisition and enrollment; load profiling, pricing and profitability analysis; electronic bill presentment and payment (EBPP); and settlement verification.

LODESTAR's contract with Shell Energy Services was its first penetration (of any significant size) into the residential billing market, a move that has some risks associated with it as the company is primarily experienced in commercial and industrial (C&I) billing. The billing structures between residential accounts and C&I accounts are very different—using divergent data models—and have little, if anything, in common.

LODESTAR has worked for years with American Management Systems (AMS), an international business and information technology consulting firm, to develop mission-critical operation systems to support customer acquisition, billing, pricing, financial management, settlement and customer care across the United States. Last October, the two companies announced that they had extended their service offerings to European energy companies.

In addition, LODESTAR also secured a contract with the Midwest ISO to provide billing solutions for MISO's entire transmission-driven customer base. As part of that agreement, MISO will utilize LODESTAR's BillingExpert™ software product for accurate and on-time billing for the complex transactions that take place over this large regional transmission organization (RTO). According to LODESTAR, BillingExpert is the only billing engine flexible enough to handle diverse billing scenarios, from unbundled tariffs to co-generation contracts. The contract with MISO added to the long list of energy customers that LODESTAR had previously accumulated, including Allegheny Power, Entergy, Alliant Energy, Arizona Public Service, Reliant Energy, and Southern Company (among others). Also, PG&E Energy Services (now owned by Enron) and Select Energy had used LODESTAR billing solutions in California.

Of course, LODESTAR has some fierce competition in the customer billing software market, including companies that handle outsourcing of billing services or just provide billing software. Such competitors include InSITE Services, Peace Software, Excelergy, Orcom Solutions, Alliance Data Systems (ADS), Enlogix, and US Power Solutions. Just two weeks ago, for instance, American Electric Power awarded InSITE Services an exclusive five-year contract to provide comprehensive billing services for its unregulated retail businesses. As the competitive energy market opens in Texas, InSITE will process bills for an anticipated one million AEP customers. AEP will provide energy services to residential, commercial and industrial customers in deregulating electricity markets, beginning with Texas and Ohio. InSITE will use its EnerBill™ billing service and EnerEDI™ system to process AEP's customer bills and manage transactions between AEP, the ERCOT and local distribution companies in open-access markets.

Consequently, among all of these competitors, LODESTAR may find the stiffest competition from outsourcers such as InSITE Services, especially in the lucrative Texas market. Yet, LODESTAR could be able to build a market edge in Texas through its already established relationship with Shell Energy. This could lead to a profitable position for LODESTAR as the onset of competition in Texas is a major development for the energy industry. With regard to population, Texas represents the second largest energy market (behind California), offering a market value of about $20 billion. Residential customers and businesses in the vast majority of Texas will have electric choice come January 2002.

The amount of this investment coming from GFI, an investment group about which not much information was readily available, is very impressive. While most investment contributions run in the range of about $10 million, it is rather startling that a billing software company should be receiving funding of nearly $30 million. This could be an indication that LODESTAR is working on a contract with a major energy company, but that is just speculation. In any event, the support of this investment should have a very positive impact on the growth potential for this already-strong billing software and e-solutions company.

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