Affordable E/CTRM by Commodity Point

A CommodityPoint Whitepaper

Affordable E/CTRM Sponsored by Woodlands Solutions

CommodityPoint, a division of UtiliPoint International, Inc. 19901 Southwest Freeway, Suite 121 Sugar Land, Texas 77479 www.commodity-point.com August 2012

Table of Contents Table of Contents................................................................................................... 2 Introduction ........................................................................................................... 3 New Entrants ......................................................................................................... 4 Profile of an Affordable ETRM Solution Provider ................................................... 5 Summary ............................................................................................................... 7 About Woodlands Solutions .................................................................................. 8 About CommodityPoint ......................................................................................... 9

Introduction At CommodityPoint's 2012 E/CTRM Technical Conference, speakers representing a wide variety of energy and commodities market participants, including heads of trading and chief information officers, all noted their dissatisfaction with the concept that there exists a singular E/CTRM system that is capable of meeting the needs of all market participants. These executes noted that the most commonly deployed systems shared numerous qualities that made them unacceptable for many companies seeking such solutions. These qualities include wide ranging functionality and commodity coverage that was not applicable for all but the largest global trading companies; and large rigid data structures that limited customizations necessary for meeting more than 80-90% of any individual company's business practices and processes. As published in the CommodityPoint CommodityAlert newsletter at the conclusion of the event in London, we noted, "There is no singular E/CTRM system that can address the needs of all participants in what is a very diverse market place. Lower cost solutions, componentized and preconfigured to meet the needs of particular market segments, will be required if technology providers want to continue to grow and expand their market reach. Additionally, as markets continue to emerge and evolve, new systems or components are required to meet the unique needs of particular geographies or commodities." Recent CommodityPoint research, including the 2011 CTRM Market Size Report1, indicate that license fees for the large scale, traditionally installed systems are now generally above $1,000,000 for those companies that operate in the top and upper middle tiers of the market â&#x20AC;&#x201C; those companies employing more than 50 trading staff, trading more than a single commodity, or operating in multiple geographies. For the rest of the mid-tier, initial license fees in excess of $750,000 are not uncommon and very few, if any, of the largest vendors will pursue deals with companies that cannot afford an initial license fee of $250,000. When combined with the cost of annual support and maintenance of 20% of the initial license fee and implementation costs that run, on average, two times the initial license fee, it's not surprising that many in the mid-tier and lower tier of the trading markets feel they can not pursue licensing of a fully supported, vendor supplied solution. This perceived lack of affordable solutions has 1) effectively locked many smaller companies out of the market for a vendor supplied and supported solution or 2) prevented companies that previously

CommodityPoint 2011 CTRM Market Size Report ÂŽ

purchased a system from upgrading to a newer version due to the perceived high costs of such an upgrade. In the current market environment, marked by constant and unrelenting changes including the impending Dodd-Frank regulations, few companies can afford to not seek out a supported solution (or upgrade an outdated version) to capture, manage, report, and monitor their trading activities. Not having such a system can create significant risk of non-compliance with new regulations (either through the reporting of inaccurate data or an inability to identify and report such data in a timely fashion) and expose the business to significant punitive fines. Fortunately, for those companies that haven't been able to afford the latest large scale E/CTRM solutions, the last several years have witnessed a new generation of E/CTRM software providers offering cost effective solutions built around architectures that are more open and, potentially more importantly, more affordable.

New Entrants According to the latest version of the CommodityPoint CTRM Sourcebook, there are more than 40 companies that provide core E/CTRM capabilities â&#x20AC;&#x201C; contract management, deal capture, physical/financial deal coverage, position management, physical logistics, risk management analytics, and back office or accounting functionality. Additionally, as noted in the CommodityPoint Ancillary SourceBook, there are dozens of other companies that provide products that support some portion of that CTRM value chain or provide additional capabilities (such as asset optimization, market connectivity, etc.) not found in what is traditionally defined as a full CTRM system. Despite this large number of vendors servicing what is otherwise a relatively small market, these recent entrants have found a willing market. Companies such as Woodlands Solutions, Pioneer Solutions, and Enuit have found success selling their technologies to not only small shops that could not readily afford a larger scale, established solution, but in many cases, selling to larger trading companies that are seeking innovative solutions without the substantial prices garnered by the largest suppliers in the market. In addition to the recent entrants, other vendors such as Data Management Solutions (DMS) have been around for more than a decade, providing single commodity solutions with specific geographic or

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market coverage capabilities (such as North American natural gas in the case of DMS). Other examples are found in Europe where there are multiple suppliers servicing the specific requirements of the diverse, regional physical power or gas markets that still dominate much of that area. While these types of solutions may meet the "affordable" criteria previously noted, few provide full CTRM capabilities across multiple commodities or the functional capabilities necessary to service markets outside their established geographic or commodity niche. So, how have the vendors that have recently appeared in the market been able to develop multicommodity/multi-market solutions that are more affordable than those provided by legacy E/CTRM vendors? The answer is largely that these newer vendors were able to make a fresh start, and as such are not burdened by legacy data structures developed over time to address a market in a state of constant evolution since the advent of FERC Order 636 in the early 1990's. Given the dramatic changes that have occurred since that time, including FERC 888 (which opened the NAM wholesale power markets), the emergence of on-line trading, new exchanges and new derivative products, it's little wonder that many of the larger, legacy systems have grown complex and burdened with vestigial functionality. For the most part, these new vendors have started from scratch, leveraging lessons learned from their previous experience as well as new technologies to provide functionally competitive solutions at a much lower price point.

Profile of an Affordable ETRM Solution Provider Woodlands Solutions serves as a good example of a new entrant which took advantage of a “fresh start” and the latest development technologies. The company, founded in late 2008 by industry veterans Mike Muse and Steve Wall (both founding members of Woodlands Technology, an early pioneer in ETRM technology), was specifically launched to address the market need for deep ETRM capabilities at a lower price point. According to Mr. Muse, while their "Phoenix ETRM" is an "affordable ETRM" solution, it still provides the core capabilities and functionality considered necessary by most trading and marketing shops, particularly those that operate in the North American markets, as well as significant advanced functionality typically only found in the legacy E/CTRM solutions. These capabilities include contract management, deal capture (including standardized interfaces to trading exchanges as well as user-definable deal blotters), position management, risk metrics (including an integrated Monte Carlo engine), credit management, scheduling, and back office settlement for

multiple commodities. The system, which has already been licensed for gas, power, crude, and NGLs, also provides advanced features such as what the company calls "PnLExplained" (which provides the capabilities to quickly identify the drivers of portfolio value change between two periods), trading limit monitoring in near real time, and sophisticated cube/pivot reporting functionality utilizing a data warehouse approach. According to Mr. Muse, the product was designed around what the company calls the Phoenix Core, "which is fundamentally a data warehouse that serves as the heart of the application. This approach allows us to provide intuitive position reporting while also ensuring a client’s entire organization shares a ‘single source of truth’." It is this architecture, in part, that enabled the company to more quickly (and affordably) develop and deploy their functionality. According to Mr. Muse, the more modular, loosely coupled solution has allowed for functional updates of individual modules without extensive rewrites of existing code, as well as lower effort (and cost) version upgrades for users of the system. Additionally, Mr. Muse notes that Woodlands utilizes industry standard technologies and development methodologies and makes heavy use of in-house code generators (according to Muse, more than 70% of the source code was codegenerated), "dramatically" reducing internal development costs as well as support and maintenance costs. In addition to providing lower acquisition, support, and upgrade costs, Mr. Muse indicates that the Phoenix architecture also provides a number of technical and user advantages that lower implementation costs and accelerate the deployment process, including: •

Service Oriented Architecture (SOA) for relative ease of integration

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Grid processing with configurable workflows without the need for middleware

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Simplified data loading via standard imports of reference and transactional data from companies and markets, to deals and market data

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Simplified configuration, all performed within the software user interface

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An integrated reporting toolset, allowing users to easily create and share custom reports

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No code scripting or "behind the scenes" configuration

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Easier user learning curve through the use of standardized screen layouts and intuitive position reporting resulting from the data warehouse approach

Summary Though the E/CTRM markets are notable for the number and breadth of commercially available solutions, there exists a widespread belief that there are few, if any, affordable solutions that can manage the business activities of multi-commodity, multi-market trading and marketing businesses. The large legacy vendors do have those capabilities, yet for the majority of trading organizations that lay outside the upper tiers of the market, the total cost of ownership have kept such systems out of reach. However, within the last five years, a number of new vendors, founded by entrepreneurs with extensive experience in E/CTRM technologies, have entered the market and applied "lessons learned" to build a new crop of products with significant functional capabilities and built using the latest technologies. Leveraging these new technologies and using innovative designs and development methodologies has enabled these companies, like Woodlands Solutions, to provide highly capable systems to a market place that has been seeking a robust yet affordable solution.

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About Woodlands Solutions Woodlands Solutions specializes in helping organizations with exposure to energy commodities improve their operational efficiency, better manage their exposures, and demonstrably improve their control over operations through their Phoenix Energy Trading and Risk Management (ETRM) solution. Phoenix ETRM provides energy organizations with a cost effective, front-to-back office energy trading and risk management solution that allows them to automate and standardize the management of their energy commodities, and was designed and built using the latest technologies and methodologies to provide customers with a powerful, worry-free solution. For more information see http://www.woodlandssolutions.com/

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About CommodityPoint CommodityPoint is the industry leader in providing Commodity Trading & Risk Management (CTRM) research, analysis and advisory services. Our services bring invaluable insight into business issues, trends, processes and technology, to utilities, energy companies, banks, brokers, funds, investors and vendors that enhance their competitive position and support critical business decisions around the wholesale commodity trading markets. Our team provides expert analysis of market trends and, in particular, the technologies and applications supporting those that participate in regional or global commodity markets. With offices in Europe and the US, and backed by an experienced research team, our organization provides an unparalleled view of the marketplace. CommodityPoint is a division of leading energy and utilities analyst and consulting firm, UtiliPoint International, Inc.

Other Resources The CTRM Blog – http://www.ctrmblog.com CommodityPoint – http://www.CommodityPoint.com TRM Products and Services Online Directory – http://www.trmdirectory.com

Other CommodityPoint Reports CommodityPoint research reports are available at http://www.Commodity-Point.com For Additional Information regarding this report or any CommodityPoint product or service, please contact Patrick Reames at preames@utilipoint.com or Mark Tredway at mtredway@utilipoint.com.

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UtiliPoint International is a wholly owned subsidiary of Midas Medici Group Holdings, Inc. (OTCBB:MMED).