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Business & Money

Wall Street bankers say utilities are not effectively telling their story.
Fortnightly Magazine - November 1 2003

time in the industry, many say, because utilities have addressed their liquidity issues and now must attempt to plan a strategy or future under a cloud of regulatory uncertainty. George Bilicic, managing director and group head at investment bank Lazard LLC, has called this time the "year of the strategic planner," and says that CEOs and CFOs face the difficulty of balancing a utility's regulatory risk with many other concerns.

"The greatest concerns of CEOs and CFOs are: 1) the continued inability to predict ratings agency actions; 2) concerns about what state regulators may do in pending rate cases or in the context of other regulatory proceedings; and 3) continued balance sheet and liquidity challenges as re-capitalization efforts are ongoing," he says. In addition, if this were not enough, Bilicic notes that those officers must do business in a sluggish economy, in a negative power price and volatile gas price atmosphere, while evaluating how to meet growth challenges in this stringent back-to-basics environment.

For example, according to Bilicic, "it's no longer possible for utilities to pursue earnings growth through strategies based on international, non-utility business or merchant efforts." Furthermore, Bilicic says that transaction strategies based on interesting themes, but without substantive support, may have difficulty finding acceptance. As a result, according to Bilicic, "companies will need to do more than merely pronounce that a transaction is attractive for reasons of convergence, geographic diversity, scale or other reasons without substantial content to back-up such reasons."

Frank Napolitano, co-head of the power group at investment bank Lehman Brothers, says that a "track record of credibility needs to be established over the next 12 months. Then companies will be in a position of credibility again and they can say, 'I am doing the following growth activity for the following reasons and here is why this one is going to work,' and people will listen with an open mind as opposed to immediately dismissing it as a mistake," he says. Like Bilicic, he says that greater clarity on the regulatory front is needed before any major investment can be made.

"The future is the question, and thanks to the blackout, it is no longer an industry question but a national question. [Regulatory ambiguity] is forcing people to not spend money because until there is clarity with respect to market structures, market design, market oversight and responsibility there is going to be a natural reticence to not buy things or build things that would be subject to that ambiguity.

"The question is how soon can this ambiguity be clarified … and everyone will have an answer to that. I don't know that there is going to be any clarity any time soon. So, that will mean that integrated utility companies will have to eventually look at their own financial profile and decide if they have enough organic growth to satisfy their investors' desires and their dividend desires. If not then those companies are going to be forced to face a question of shrink, which is rarely an acceptable one or, where can I grow into my core