Only one year into the venture that was going to make her or break her, Rebecca MacDonald woke up feeling already broken. Every joint in her body hurt, even her jaw. Although she didn't yet know the diagnosis-rheumatoid arthritis-she did know that this was no time to get sick. Her business, Energy Savings, was running out of cash, and she was running out of options: She had already struck out with the banks and didn't have any family whom she could tap either.
Maybe the time had come to give up. She was, after all, a 46-year-old widow with two children to think about and a novel business model that bankers didn't understand.
Instead, MacDonald poured every cent she had-$1.5 million earned from her previous ventures-into the new company. "I was in love blindly with the business," she says. "Nothing could stop us. Nothing could go wrong."
It was a decidedly ironic decision. Here was a woman risking every cent she had on the assumption that the populace would pay to avoid risk. And not a very scary risk at that: MacDonald was betting that large numbers of homeowners would pay a 20% premium to lock in their natural gas purchases for five years. This brand-new concept looked like a hard sell, given that gas prices had actually fallen during the previous decade.
Yet the gambit-turning the sale of energy into insurance-made MacDonald a very rich woman and created the most successful income trust in Canadian history in total return. Energy Savings' customer count has rocketed from 37,500 in 1998, the year MacDonald made her bet, to 1.3 million today. The concomitant leaps in revenue, gross margins and earnings have all been achieved without racking up one cent of debt. Investors who bought in when the company went public in 2001 have been rewarded with 20 cash distributions that have climbed steadily-from 25 cents to 91.5 cents-plus a stock price that, at $19 at the end of November, has risen more than sevenfold.
As for the problem of rheumatoid arthritis-well, Rebecca MacDonald is not easy to beat.
er parents found this out the hard way in postwar Belgrade. The Mitics, who met in 1950, came from different strata of Serbian society: MacDonald's mother, who had come from a prosperous merchant family in Bosnia, was a banker before the Second World War. Her father, on the other hand, was a farmer's son. Gifted in mathematics, he was plucked out of his village to attend an elite school in Belgrade.
The war played havoc with the lives of both families. MacDonald's father was imprisoned in a German concentration camp, and returned home to find Yugoslavia transformed by Marshal Tito into a socialist state. Her mother's family lost everything. "My grandfather was put to work as the manager of his own store," MacDonald says indignantly. "Now that's expropriation for you."
MacDonald's father, however, climbed the socialist apparatus all the way to the corridors of power. As Tito's energy minister, he was in charge of building energy infrastructure for the entire country. He often took his daughter with him on business trips, hoping the child, who showed signs of inheriting his mathematical brilliance, would become an engineer like him. "I grew up with energy, coal, hydro, nukes, oil and gas," says MacDonald. "As a child it was ingrained that the most important thing was energy."
Her mother had given up her banking job to stay home and raise Rebecca and her sister-having a nanny was considered too bourgeois in the new socialist regime. "She resented that her whole career went sideways because of the girls," says MacDonald. "So she really put us under a glass dome." Her mother decided that Rebecca ought to devote herself to the piano, which spelled exhaustive studies on top of regular schoolwork. "I had no life," MacDonald recalls. "I didn't have a childhood. I didn't have friends. I didn't play. Free time meant I had to practise piano, and I hated it," she says. "I really kind of lived in fear."
MacDonald's mother then sent her daughter to medical school. But once she'd completed her courses in 1974, MacDonald, now 22, decided she'd had enough of having her life story dictated to her. She had to get away, which meant getting out of the country.
MacDonald plotted her escape carefully, but she chose Canada by fluke-its embassy was across the street from the American one, which turned her down. She told her mother she was flying to the seaside town of Dubrovnik for the weekend. When she got there, she called her mother from the hotel and then waited; her mother, as expected, called back to check that she was truly there. After hanging up, MacDonald rushed to the airport and flew back to Belgrade, where a friend was waiting with her passport and an airline ticket to Toronto.
Before boarding the plane, MacDonald posted a letter home: "Dear Mother: I'm leaving. I'm never coming back." Her father, devastated, dispatched an emissary to Toronto in a vain attempt to persuade her to return home. (MacDonald eventually brought her widowed mother to Toronto to live; she visits her every morning and evening.)
In Toronto, MacDonald was stunned to learn her medical schooling was worthless. But this was not enough to deter her from starting a life in Canada. She learned English in a hurry, got a clerical job and met her husband, Pearson MacDonald, who was in the water filtration business. "He taught me the most important lesson-it's all about sales," she says. "You could have the best idea but if you don't sell it, you'll never get ahead." Pearson also revealed the art of door-to-door sales. "It's the most difficult form of selling, but the most cost-effective," MacDonald says. She did time as an Avon lady in a rough Toronto neighbourhood, but quickly saw there was no money there.
While she was learning door-to-door, opportunity was dawning in a business that was once tightly controlled-natural gas. In North America, natural gas had long been regulated from well to pump, but the price controls had a perverse result: shortages of natural gas in the mid-1970s. Deregulation was introduced in jurisdictions across the continent on the premise that the free market would do a better job of managing supply than regulation had.
Prior to deregulation, gas utilities, which controlled the pipes into homes and businesses, enjoyed complete or virtual monopolies. In 1986, Ontario opened the retailing of natural gas to competition. Customers would be able to buy gas from anyone-not just the utilities-and still get their gas piped into their homes and businesses in the usual way. Here, the energy minister's daughter sensed an opportunity. After all, two-thirds of Ontarians heated their homes with natural gas. "How often do you come across a whole new industry?" she asks. "I knew nothing about it…but I had nothing to lose, so I rolled the dice."
Scraping together her savings, MacDonald launched Energy Marketing Inc. in 1989. On her first sales call to a business, the men around the table asked her if her boss was going to turn up. Then they gave her a skill-testing question about energy math. She aced it-and so landed her first client.
Customers often were skeptical, for good reason. There were so many complaints about energy marketers making misleading and even fraudulent claims on consumers' doorsteps that the Toronto Star bluntly warned readers: "Beware of door-to-door gas marketers." But MacDonald persisted, and even won over her husband. He'd thought the venture's chances were dubious, but he now left his own business to join his wife's as sales manager.
une 22, 1992, was the day the MacDonalds' son, Daniel, was set to graduate from Grade 6. But it was not a happy event. MacDonald was left fuming because Pearson didn't show for the ceremony. He had been in the grips of a personal crisis, drinking too much, and the couple had separated a few months earlier. Still, she didn't understand how he could disappoint their son on this special day.
In the middle of the night, MacDonald's phone rang. It was a constable informing her that Pearson had been killed in a single-car crash near Georgian Bay, where the family had a cottage. While MacDonald was still absorbing the news, the house filled up with friends and relatives. At 6 a.m., she asked them all to leave. An hour later, Daniel woke up and stood in the doorway, asking, "Where is my dad?" MacDonald got up from her chair. "Daddy was in an accident. Daddy did not survive," she told her son. Daniel went limp. "He screamed an animal scream. I thought I was going to lose this son."
After the funeral, MacDonald thought hard about what the future held for her and her children, Daniel and Alexandra, then age 12 and 9, respectively. "I'm very analytical," she says. "There was nothing I could do to bring him back. I knew that if I didn't hold the family together, we'd be on welfare." She decided she would never rely on anyone else again. "I made a very conscious decision to focus on the kids and focus on my business."
Before long, MacDonald was back at work, putting in 14-hour days. "She's a very tough, determined lady," says her friend Chief Justice Roy McMurtry of Ontario's Court of Appeal. "It's hard for me to imagine Rebecca just deciding to revert to an abbreviated day in order to spend more time with her children," he says with a chuckle. That said, "Obviously she was concerned about providing for the future of her children, which she's done exceedingly well."
Three years later, in 1995, MacDonald concluded that her fledgling energy marketing company was too vulnerable to survive on its own in Ontario. The company could make money as long as the utility's gas price was high, because it bought five years' worth of gas at a price a little below the utility's floating price. But as the utility's price dropped, MacDonald knew that she was bound to get squeezed out of the business.
So she sold her customer contracts to a company that later sold them to Direct Energy, which had been one of her key competitors. Then MacDonald and her colleague Brennan Mulcahy tried their luck dispatching door-to-door salesmen to sell gas deals in the newly deregulated United Kingdom, with modest success. Meantime, MacDonald was struck by how Direct Energy had gone public, raising $60 million, "an unimaginable sum" to her. It had become Ontario's biggest independent natural gas marketer, with a 20% market share.
MacDonald and Mulcahy re-examined the Ontario market. It looked good: Natural gas was finally fully deregulated, so marketers could offer customers a fixed five-year rate and get their company name on the utility bill-something that had been impossible previously.
A plethora of players already in the field had sewn up more than 40% of the market, but MacDonald saw an opening. A lot of the new marketers were trying to make money speculating on natural gas prices, or were wasting money trying to sway customers with advertising.
So MacDonald and Mulcahy decided to jump in again. By selling door-to-door, they figured they could sign up a customer for $160 in commissions and back-office costs-far less than the estimated $400 that some of their competitors were paying. The duo knew that if they could buy five years of gas at a set price and apply a $170 margin per customer, they'd earn back their investment in less than a year, and enjoy four more years of dependable revenue.
It was at that one-year point that Energy Savings was hit by its cash crunch, and MacDonald by rheumatoid arthritis. In the latter struggle, conventional drugs helped, but MacDonald still couldn't walk without pain. "Sickness is not in the plan," she told Ed Keystone, a Toronto doctor and researcher in rheumatoid arthritis-"a wheelchair is not my image." Dr. Keystone prescribed an experimental drug, a TNF (tumor necrosis factor) blocker of the sort that has since revolutionized treatment of the disease. There was a hitch: It would cost her $27,000 a year. That was a no-brainer for MacDonald's risk detector.
A week after her first treatment, she was back to normal. Then she started weaning herself off the drug. "Rebecca, you're asking for trouble," Dr. Keystone warned, but MacDonald paid no attention. "I was frustrated because she was running the show," he says. Still, MacDonald's experiment on her own body worked: The symptoms didn't return.
"No one has ever seen a patient like this," says Dr. Keystone. "She's got such willpower." She also has "the confidence of 600 horses" and an ego "the size of an apartment block," he says. "She's the smartest person I've ever met. She's academically smart and street smart."
But MacDonald evidently doesn't feel she solved her medical problem all on her own, because in 2002 she donated $3 million to Toronto's Mount Sinai Hospital to build a rheumatoid arthritis centre in her name. The hospital installed Dr. Keystone as director. The only hitch has been decor. When MacDonald insisted on Roman columns and hand-painted marble trim, Dr. Keystone, knowing that people at the hospital were already complaining about the idea, protested.
But as he discovered, MacDonald will have her way.
nergy Savings' basic business proposition still puzzles some observers. It's true, going by the company's figures, that people who locked in their natural gas prices in 2000 saved $823 on average over the five-year period. But why would anyone oblige themselves to pay a 22% premium on a natural gas price that's close to its all-time high? It's "expensive insurance," says Anthony Scilipoti, an analyst with Veritas Investment Research and one of Energy Savings' few critics. The company's ability "to sell an undifferentiated service at a premium is unsustainable," he wrote in a June, 2005, report. Mulcahy counters that Energy Savings, its name notwithstanding, is selling stability, not savings.
It obviously works for some people. Energy Savings already has a 24% market share in its core business, the Ontario natural gas market, and it's expanding into Alberta, B.C., Quebec and the United States. Energy Savings says its customer population (which is two-thirds residential, one-third commercial) increased by 18% in 2005-or 24%, for a total of 1.3 million, if one counts the electricity and natural gas customers in Alberta and Ontario that Energy Savings acquired from Edmonton-based power company EPCOR. In 2006, Energy Savings projects that it will rack up a net growth of 17%-another 214,000 customers. The increase will come in part from new commercial electricity customers in Ontario, and in part from residential gas customers (and, in some cases, electricity customers) in British Columbia, Alberta, Manitoba, Quebec, Illinois and New York.
Of course, many a rosy projection for stateside success has come back to haunt Canadian companies. But to Energy Savings, the customer in Illinois is the same risk-averse animal as the one in Ontario, with one big difference: Ontario is a mature market, where 46% of residential and commercial consumers have locked in, compared with less than 10% in Illinois.
Scilipoti, needless to say, is skeptical about Energy Savings' growth prospects. Its customers may sign contracts, but still about one customer in 10 is lost to the company each year because they move or die; others simply don't renew their contracts. All told, Energy Savings has to replace 14% of its customers annually-so, in Scilipoti's words, it "must run faster just to stand still." That means moving into new markets that are not as profitable as the company's home turf. (Given varying market conditions, a Canadian natural gas customer works out to be worth 1.7 times more than a Canadian electricity or American natural gas customer.) What's more, Energy Savings' targets for growth in the U.S. assume it will sign up a larger percentage of customers than it did in Ontario-which is very ambitious, Scilipoti notes, considering its huge success in Ontario. The upshot, in his view: Energy Savings' growth rate is bound to slow down.
Yet Energy Savings has met or exceeded its targets up to now. And with sales up 25% in 2005, to $921 million, plus an 18% gross margin and a unitholder payout ratio of 65% to 70%, other analysts aren't worried. This is partly because Energy Savings, unlike many competitors that dropped out or were bought out, has nailed the art of door-to-door sales.
The one big competitor that does know how to make the business work is Direct Energy, which was taken over by the dominant British gas company, Centrica plc, in 2000. Direct Energy says it is now North America's largest energy and home services retailer, with more than five million "customer relationships" in Canada. As for Energy Savings' small competitors, they may know how to sell at the door, but Mulcahy says they don't have the resources to buy a five-year supply of gas at a set price, so they're vulnerable to changes in the market.
Competitors, in any case, are less of a concern to MacDonald than politicians are. "I worry all the time," she says. "I worry about the regulatory regime." When you enter the Energy Savings office, the first thing you notice is an oil painting of MacDonald's late husband. But hanging just inside the door to MacDonald's own office is something equally conspicuous: a framed letter from Ernie Eves, who took over as Ontario's Conservative premier in April, 2002. The letter congratulates MacDonald for being named woman entrepreneur of the year by the University of Toronto's Rotman School of Management. But the prominent placement of the letter is intentionally ironic: "Ernie Eves represents to me everything I hate about politicians," MacDonald says.
In May, 2002, as part of its move to deregulate the electricity market, Ontario did away with its subsidized rate for power. It was a grand opportunity for Energy Savings, which promptly signed up 154,000 customers on five-year deals.
But in the heat of the summer, as heavy air-conditioning use drove up power demand and prices, consumers who were still paying the floating rates complained bitterly. The rumblings came at an awkward time for Eves. Deregulation was already bedevilled by cost overruns and delays in the renovation of key nuclear plants, as well as disarray in the administration of Hydro One, which runs Ontario's power grid. With an election on the horizon, Eves's devotion to letting the market rule dissolved.
On Nov. 11-"11/11," as MacDonald calls it-she was summoned to a Queen's Park briefing, where brown envelopes were passed out. Inside was an announcement that Eves was freezing electricity rates at 4.3 cents per kilowatt hour-below the cost of generation. "This must be a typo," said MacDonald. When the staff assured her it was not, she gave them an earful: "I was mad. I was vicious." She told the pols, "I will make sure everyone in the province knows what an incompetent premier he is." Then she walked out.
The company's growth strategy had just been ruined. Its stock price plummeted from $16 to $12. The move to subsidize homeowners and small businesses cost Ontario-which is to say, it cost the very taxpayers who were being saved from high power costs-hundreds of millions, and didn't even save Eves's job.
The day after 11/11, the company directed its sales force back to the natural gas market. Mulcahy then started making plans to expand outside Ontario.
Flip-flops on energy pricing are not MacDonald's only concern about government. When Ottawa announced it was reviewing the tax status of income trusts in September, Energy Savings' stock immediately sank 14%. MacDonald was not too happy. "Oh, there they go again," she says of the review. In her mind, it's just more evidence of "how reactionary a government can be."
One-quarter of Energy Savings' customers are now outside Ontario, but it's a cautious expansion, one fuelled by cash rather than debt. To avoid getting burned as they did in Ontario, MacDonald and Mulcahy say they'll only enter markets that have been deregulated for three years and have seen at least 8% of buyers lock in. Stateside, they started small in Illinois, investing $6.7 million and dispatching 125 sales agents. In the first year, they signed up 52,000 gas customers and locked in a margin of $37 million over five years. This fall, the sales job began in New York, where only 8% of 4.5 million gas customers have locked in. Most analysts are impressed. The Royal Bank's Dirk Lever wrote: "It is a great Canadian growth story that pays an ongoing (and growing) distribution, has no debt, $40 million in the bank and has invested a relatively small amount in [a]U.S. expansion...with upside potential."
In mid-September, MacDonald was enjoying the ride. She reckoned her six million shares were worth, on that particular day, $140 million. She laughed off the money, saying it hasn't changed her, a street-smart saleswoman with a mind for math. Having turned over the CEO's job to Mulcahy last April (she is now executive chair), MacDonald is taking some time to have fun. She has just bought a Porsche Cayenne and is in the midst of building and decorating a 40,000-square-foot beachside villa in the Dominican Republic. Being a stickler for detail, she's helping to lay the tiles herself. She has no husband-her choice, she says-but she has powerful friends, as the snapshots on her bookshelf of billionaire entrepreneur Jimmy Pattison and Roy McMurtry suggest. "Talk about overcoming adversity!" Pattison says. "She's a remarkable story of what can be done in the free-enterprise system."