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Leadership in Finance: ICE Energy’s David Schwarzbach

The unlikely CFO moved from agriculture to activist to financial anchor for a burgeoning technology company.
Marie LeoneJune 30, 2009

It’s not every corporate finance chief who authors an article in Scientific American opining on Iran’s nuclear weapons program. But David Schwarzbach didn’t take an ordinary route to the CFO seat.

The 40-year-old finance chief of ICE Energy studied physics and ecology – not finance – as an undergrad at the Davis campus of the University of California, a haven for scientific research. And he started his career at the high-profile environmental activist group, the Natural Resources Defense Counsel, not a public accounting firm. He also attended Princeton University to earn an advanced degree, but not an MBA. Instead, it was a master’s in public administration from the university’s Woodrow Wilson School of Public and International Affairs.

Yet, it was while working for the NRDC  that Schwarzbach first took notice of the role corporate finance played in the economy. “It was during the Clinton/Gore administration, and we had a lot of optimism about what could be achieved on the environmental front. But I have to say that we really didn’t achieve as much as we hoped for. It struck me that if we wanted to make a real difference and scale [green] technology, we had to be able to bring finance to bear. And that’s really been what’s driven my career over the past 15 years, acquiring those [finance] skills so that the technology could be widely deployed.”

So he went to work on Wall Street. With a new Ivy League graduate degree in hand, Schwarzbach headed to GE Capital, where he cut his investment-banking teeth on project finance. He eventually made the jump to Lehman Brothers and then Morgan Stanley, where he placed an aggregate $20 billion in capital for a broad range of companies, including many in the electric power sector.

His first stint as a CFO came in March 2008, when he joined ICE Energy, a small technology company based in Windsor, Colorado. The company has updated a century-old air-conditioning trick: using ice to cool off the air pumped into buildings. The company uses a storage unit that is retrofitted onto existing industrial and commercial air-conditioning systems. The unit freezes water, storing it as ice during the night when electricity demand and kilowatt prices are low.

During peak demand hours, the ice is used to supplement the energy-hungry air-conditioning units, and cut the electricity demand from utility companies. “What’s interesting is that some utility companies started out as ice-delivery companies. Then electricity came along, and they made the transition. There is a certain elegance to the fact that here we are, a 19th Century technology in a 21st Century box,” noted Schwarzbach during a recent interview with

What follows is an edited version of a recent conversation with Schwarzbach, who discussed what it’s like taking the finance reins at a start-up company when the economy is tepid, at best.

Schwarzbach ICE4“The customer contracts – with a high-credit quality counterparty like a utility – means we can use the contracts as an asset for raising debt.” — ICE Energy CFO David Schwarzbach

Your road to the CFO post has been atypical. When did the corporate finance bug bite you?
My background is probably a little unusual for finance.  My undergraduate degree is in agriculture, and while at the UC Davis, I studied something called physiological ecology, which is the application of physics principles to environmental systems. So that has actually turned out to be helpful over the years because I have some understanding of the power and energy industries.

You’ve managed to stay focused on a green-energy goal while working for some of the biggest names on Wall Street. How has that felt?
It was a very interesting journey, and of course now things have become more interesting with all the transformations of the past 10 months. Seeing Lehman fail just seems so unimaginable. Seeing Morgan Stanley almost fail, I just couldn’t believe it. But I really set that [green] goal for myself a long time ago, and it’s very rewarding to be able to come back and bring that full circle.

ICE Energy is a six-year-old private startup. I assume the company can be categorized as a small, meaning it has under $250 million in annual revenues. What are your revenues and potential profit?
We are a small company, and have modest revenues. [Schwarzbach declined to be more specific]. The profit question is an interesting one. We have a really important choice to make over the next several years. Whether to continue to invest in the assets of the company and grow the business, or drive directly to what is probably a nearer-term goal of reaching cash-flow break-even, and then profitability after that.

The decision is driven, in part, by the traction that we attain in the industry. We think the technology provides an enormous opportunity, but you still have to have traction. Second is the availability of capital. And after the past few months, bedrock assumptions have changed about the availability of commercial paper or very standard credit lines. I would say that we’re going to be much more focused on growth for the next several years than on profitability per se.  But getting to the cash-flow break-even is important. And that’s something that we will strive for over the next two to three years.

Do you think your experience as an investment banker has helped in your new role as finance chief?
Yes. It was very helpful. When I was at Morgan Stanley I did work on equity private placements for start-up technology companies. That experience has certainly informed the way that we went about raising capital last year. Also, my background in project finance at Lehman Brothers helped.

What’s different about green technology is that you really have to combine venture capital with project finance. You use the venture capital in the early stage to develop and merchandise the technology and go through the sales cycle. But then you have to transition into using much larger amounts of capital to build out a project. One of the real strengths of our partner, Energy Capital Partners, which led our series B [financing] in September, is that they can go both ways – supply equity and project-finance capital. In the green technology space you need different types of capital to scale.

How does the customer financing part of the deal work?
We are using a classic project-finance model, an approach used by various independent power producers that have built peakers and then entered into long-term contracts with utilities. [Peakers or peaking units are smaller power plants that supplement the available power when demand for electricity is high]  We’ve taken that model, which is familiar to the capital markets, familiar to utilities, familiar to developers, and we have matched that to a new asset class – distributed storage, in our case.

In addition, Energy Capital Partners has made available $150 million in equity for project-finance purposes. ICE Energy would then add project debt to raise all the capital needed to actually deploy the technology. The debt would likely come from the bank market. So in terms of green technology, Energy Capital Partners invested at the corporate level using venture capital but also brings a much larger sum of money to help deploy a project.

It’s unusual for a CFO to become involved in product development, but ICE Energy’s product seems to be financial in nature. Is that a fair representation?
Part of it is finance. I think that’s a good way to put it because our solution is a physical asset that is aggregated into smart-grid technology. That’s the foundation. But you also need to be able to bring it to the customer, which are utilities at this point. Some utilities will choose to [incorporate] the technology into their rate base, meaning that they will work through their regulatory process and earn on the project directly. In other cases, it will make more sense for them to enter into a long-term contract with us, in which Energy Capital Partners would own the project and ICE Energy would operate it on their behalf. The distributed asset represents a different profile for lenders. That’s a long-winded way of saying that Energy Capital Partners equity is necessary for the lenders to lend because they need equity beneath them.

So the project hinges on making lenders feel comfortable with your project?
We’re using very familiar and well-understood financing techniques. We’re just applying those financing techniques – including a power-purchase agreement – to a new asset class.

Despite taking some lending risk out of the projects, lenders must still be a little gun-shy about lending during a credit crisis. What’s your opinion of banks’ willingness to lend?           We have reached out to a number of different lenders and we’ve looked at a lot of different ways to raise that debt. The starting point is always around the contract. That is, to strengthen the contract with the utility. Second, as with any new technology, there is a premium that you’re going to pay for those first pieces of debt.  And so you get into a dialogue. From my experience, I have a sense of how we should structure the deals, how should we approach folks, what we need to do to get them comfortable with the risk.

Theoretically, what would make an investment banker comfortable with arranging an ICE Energy bond issue, for example?
One of the most crucial pieces is working with an independent engineer to review the technology. That independent engineer’s report is really a cornerstone of any project-financed debt. Those engineers are doing banking. They help us with our analysis of the units and determine the units’ reliability and how they will operate. It is an absolutely crucial piece of the equation. This part of the deal also is very particular to energy and project finance.

Since 2002, ICE Energy has raised $74.4 million through several funding rounds. How was the money used?
In our case, the series A and series B rounds have funded the commercial development and first deployment of the technology. Our series C will be used as our growth capital. All of that is pretty typical.

On a percentage basis, do you carry a lot of debt compared to equity?
Today it’s largely equity. We do have some small equipment leases. In addition, the customer contracts – with a high-credit-quality counterparty like a utility – means we can use the contracts as an asset for raising debt. That can be done either directly through project finance, or through the utility if it chooses to purchase and own the asset. The contract can serve as collateral for commercial debt, and we are certainly exploring those options.

From a cost-of-capital perspective, debt is much cheaper. Will you be issuing more debt in the future?
We’re a classic technology company. Think about Microsoft, another classic technology company. It issued its first debt offering this year. [In May, Microsoft raised $3.75-billion via five, 10 and 30-year senior unsecured notes in its first debt issuance.] A traditional technology company is almost always equity financed. That said, debt is less expensive, and I think it plays an important role in your capital structure.

Has the credit crunch affected ICE Energy either directly, or indirectly through suppliers or utility partners? 
The credit crunch is having an impact. Broadly speaking, the utility industry has become much more sensitive about how it deploys capital. So that affects us. More directly, the credit crunch has affected interest rates for project debt, increasing the rates substantially from historical norms. The net effect is that we have to increase the pricing we put into a utility contract. There’s been an overall increase in the cost of capital for everyone.

Was it possible to apply any of the lessons you learned at the larger companies to a small start-up like ICE Energy?
GE Capital has been an incredible foundation for me. When you work there, you see how to do a project the right way. This whole project-finance approach we use today, with regard to applying it to a new asset class, and the transfer of total system efficiency [to the customer] came from my first days at GE, where I learned project finance. At Morgan Stanley, when we were underwriting transactions, I learned a lot of accounting because we ran into dozens of companies with many issues. So I have a great familiarity with accounting.

But you are not a CPA. With that in mind, how did you structure your finance team?
There are 63 people working at the company, with five in finance. I was lucky to have a strong team in place when I arrived, including a controller and a director of financial planning and analysis. It’s good to have a strong, inward-looking team, because I come from investment banking and play an outward-looking role.

Although ICE Energy is a private company, it files its financial results using generally accepted accounting principles. Why?
We’ve had audited financials since the company’s inception. We have a very, very strong board, including Joe Gorman [former chairman and CEO of TRW Inc.] who currently sits on the Alcoa board. The board members are used to seeing financial results reported in GAAP for the companies they are associated with. Their expectation is to see GAAP-audited financials, and strong controls and reporting. The whole approach of the company since it was founded was based on an appreciation of the size of the opportunity. That includes generating higher expenses [than non-technology businesses] but also raising capital, delivering on promises, and scaling the technology. So accounting is just one piece, but it is important.