The pros and cons of selling the transmission system.
For an electric utility these days, selling the dry-as-toast wires business can seem awfully tempting. CMS thought so. It took in $290 million (or 1.2 times book value) for selling its transmission system. Trans-Alta pocketed even more-1.4 times book ($560 million). The buyer in each case was Trans-Elect. But then DTE garnered a whopping $610 million-1.5 times book-in selling the Detroit Edison grid system to Kohlberg, Kravis, Roberts & Co. (KKR), kings of the leveraged buyout. Not to be outdone, Trans-Elect has now offered to pay 1.6 times book ($239 million) for Illinois Power's transmission lines, but that deal may have run into some snags on the regulatory front.
With prices like these, how could any utility choose to sit on the sidelines, spurning all that cash when the opportunity might not come again? Yet there has been no rush to sell. The tax liability appears daunting, given all those years of depreciation deductions. And then there is the question of what to do with the money, and the implications for the future health of the utility company, not to mention how shareholders and ratings agencies will view the sale.
Selling Isn't for Everybody
Morgan Stanley's Gary S. Barancik, a managing director in the bank's global energy and utilities group, agrees that the selling of transmission assets is not going to be a winning proposition for every utility. The utilities most likely to sell are those that have liquidity issues, or those that will otherwise lose control over the asset, as it will become part of an ISO or RTO.
"The key issues," says Barancik, "are whether they are giving superior value to their shareholders, how much taxes would be paid, how much from the sale would be shared by ratepayers, and whether owning transmission continues to benefit generation."
Barancik says the theory is that you cede functional control of your assets to an RTO, which runs all the day-to-day transmission operations. The utility no longer has any ability to use the transmission system to influence generation in their market. But the reality, he says, is that even under the RTO system there are still ways that many utilities think that ownership of transmission can have benefits to their generation.
Barancik also says that utilities selling transmission assets must have a strategic view of what they will do with the proceeds of a transmission asset sale. Shareholders and credit ratings agencies may respond favorably to reducing debt, but they also may show concern that the utility has given up a stable earnings business. They might also be concerned if the proceeds went toward a risky, unregulated business outside of the utility's core competency, he says. And, utility shareholders are savvy enough to see the efficiency benefits of vertical integration.
The Dangers of Sitting on the Sidelines
It would seem that the decision to sell transmission assets is a proposition that requires serious consideration by utility chiefs, but a decision not to sell carries its own set of risks. Potential buyers of transmission are