Top executives at AEP, the California ISO, and El Paso Electric address key challenges and opportunities.
Tracking Stock for Utilities: Highway to Higher Valuations?
of common stock outstanding. Sprint's Class A Common Stock tracks the company's FON Group, which consists of Sprint's long-distance and local telecommunications divisions. Sprint's PCS Common Stock is linked to the PCS Group, which includes Sprint's wireless mobile telephony services. Sprint's PCS tracking stock has performed spectacularly, with a fivefold increase in value in just over a year, and MCI WorldCom intends to adopt it as its own tracking stock after it completes its acquisition of Sprint.[Fn.5] Despite a shakeup in its executive suites, Global Crossing Ltd. is proceeding with plans to issue a tracking stock for its Internet-services business, GlobalCenter Inc.[Fn.6] SBC Communications has said it may create a tracking stock for its wireless operations. And from Atlanta comes word that BellSouth is contemplating issuing as many as three separate tracking stocks - one each for its wireless, international, and Internet divisions.[Fn.7]
Dressing Up the Divestiture
The success of telecommunications "trackers" suggests that utilities may be able to profit from instituting tracking stock capital structures that allow an investor to "cherry-pick" among regulated and deregulated businesses. But can't a company give investors the same choice by incorporating and listing separate subsidiaries? Why implement a tracking stock structure instead?
Because tracking stocks offer the benefits of segregated shareholdings without sacrificing the advantages of a combined balance sheet - greater borrowing capacity, higher credit rating, and the stability of a diverse asset base. In addition, a single corporate entity means one tax return and the continued ability to shelter income from one division against losses in another. And even for a utility considering an eventual spin-off, partial or complete, of some or all lines of its existing generation business, a tracking stock can be a useful intermediate step. With separate financial reporting already in place for a utility's generation operations, capital markets should be well prepared for receiving and pricing stock in a generation subsidiary that the utility eventually spins off.
Green Light From Wall Street . Tracking stocks often result in greater analyst coverage and better valuations for the divested subsidiary. Wall Street is familiar and comfortable with the strategy of prefacing a spin-off with a tracking stock issue. The stock market's enthusiastic reception of US West's separate tracking stock for its Media Group culminated in the Group's spin-off as an independent publicly traded company under the name MediaOne in November 1998.[Fn.8] Not long after that, in April 1999, AT&T entered into an agreement to acquire MediaOne for $85 per share, representing a return of over 500 percent since the stock was issued in September 1995 and over 200 percent in the five-month period since US West had completed the spin-off.[Fn.9]
Attracting Mr. Right. In addition to yielding a higher valuation for a spin-off, a capital structure with different classes of common stock that separately track a utility's generation and T&D operations also could serve as a prelude to a successful "exit" strategy. A utility with a tracking stock equity structure that puts itself up for sale will attract a pool of potential acquirers that includes those interested in acquiring all of