March 15 , 2002
Inventing a Business in Wires & Pipes
IF COMPETITIVE ELECTRIC MARKETS PROMISE LEAN MARGINS and slim savings on commodity sales, then perhaps transmission and distribution companies could play a larger role in selling end-user services.
Yet low-risk T&D companies, building on their reputations as reliable providers, may need to grow to acquire the "critical mass" needed to make money selling services over delivery systems.
One of the few, if not only, businesses publicly betting on this strategy is the $4.1-billion GPU Inc. of Morristown, N.J. - and GPU means business.
The company's first step is to get out of generation. It is auctioning its share in 26 fossil and hydropower plants. The combined book value of the plants is about $1.1 billion. GPU was negotiating with a single buyer - possibly PECO Energy Co. - for its two operating nuclear generating units, including one at Pennsylvania's Three Mile Island. GPU is exiting the merchant plant business as well.
While it divests generation, the company is boosting its customer base overseas. It increased its end-user base by more than 17 million people by acquiring half the United Kingdom's Midlands Electricity PLC, a distribution company (sale price: $2.6 billion), and all of Australia's PowerNet Victoria, a transmission company (sale price: $1.9 billion).
This spring, the company was eyeing privatization opportunities in Brazil, although when Eletropaulo, Latin America's largest distributor, went on the block in April, GPU didn't have enough time to prepare financing, says William J. Dennard, company spokesman.
The company's goal is to acquire the profitable delivery systems of the democratic world, says a half-serious Fred D. Hafer, company president, chairman and CEO.
Pleasing the Shareholders
In reality, GPU is limited under the Public Utility Holding Company Act to investing no more than 100 percent of its retained earnings.
But Hafer, by helping set the global road map, is on his way within those parameters leading GPU to wherever wires, poles and pipes will go.
Along that path comes some predictable realizations. "The infrastructure business that we have chosen, will, by virtue of its continued regulatory oversight, have¼ modest earnings, as compared to unregulated competitive businesses," Hafer says. "They will be, by definition, regulated rates of return. We think on the other side of that, however, there's a certain predictability and stability." And some investors, he says, find that attractive.
In assessing GPU's return on equity for T&D in the U.S., Hafer and Dan Ford of HSBC Securities Inc., offer the same evaluation: With flat inflation and steady interest rates, investors can expect an 11.5 percent ROE. On non-U.S. investments, Hafer puts ROE at 15 to 17 percent.
GPU's announcements haven't hurt its standing in the financial community, notes Frank M. Heard of Arthur D. Little Inc. "If you look at GPU's stock performance [in mid-April], it's holding up pretty well," he says. "It's near a 52-week high. The strategy is out there. Wall Street seems to be rewarding that. I think the reason they're rewarding the company strategy is because it is well articulated.
"They've got a multiple on earnings of about 16 times earnings right now," Heard adds.