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Business & Money

A spate of proposed U.S. tax rule changes soon may open a window of opportunity for certain utilities.
Fortnightly Magazine - May 2004

Business & Money

A spate of proposed U.S. tax rule changes soon may open a window of opportunity for certain utilities.

In the mid-1990s, before the rise of the Internet and the fall of Enron changed the calculus of business investing and the regulatory landscape, the historically staid U.S. utility industry began to be viewed as a "growth play." This triggered a global buying spree that led U.S. companies to invest tens of billions of dollars in electricity generation and distribution businesses all over the world.

Those heady days are gone, and so are the sky-high valuations of those once-prized overseas power-plant transmission and distribution assets. However, a spate of proposed U.S. tax rule changes, such as those outlined in the Homeland Investment Act on Repatriation (HIA) may soon open a window of opportunity for U.S. companies with unrepatriated foreign earnings. If passed, HIA potentially would allow U.S. utilities to bring money back into the country without harsh tax penalties, thereby freeing up capital to reinvest in assets here, pay down U.S. debt, or fund other liabilities, (, under-funded pension plans).

However, to benefit from HIA, U.S. companies will have to move fast and incisively, because the decisions and execution windows are likely to be open only for a brief period. To get ready, companies should take the time right now to carefully analyze, understand, reorganize, refinance, and put detailed tax and business plans into place.

Braving Extreme Market Conditions

In the period since Enron's 2001 collapse, the U.S. power industry's overseas acquisitions, many in emerging markets, have been written down on company balance sheets to values far below the record-breaking purchase prices paid only a few years earlier.

This value erosion has continued. In the last 18 months alone, U.S. utilities saw the value of their holdings drop sharply, by billions of dollars. To stem this flood of losses, dozens of companies sold much of their international holdings. Others simply walked away, handing over the keys to anyone who would take them.

Indeed, the universe of U.S. investor-owned utilities and publicly traded independent power producers that purchased, sold, shed, consolidated, or morphed their global holdings is a veritable who's who of the investor-owned utility industry.

The beneficiaries of these developments have been the early U.S. sellers, and various offshore bargain hunters, including some of the largest European and Asian utilities, who were able to make strategic acquisitions at fire-sale prices. The interest of those buyers, and that of other investor groups, has created active markets for buying and selling utilities around the world: in Europe, Central and Eastern Europe, as well in the Middle East, Latin America, Asia, and the Pacific Rim. And U.S. power companies continue to show a willingness to part with overseas utility holdings at the right price. However, some asset valuations remain so far underwater that even deeply discounted prices don't justify current sales transactions.

Thus, even as strategic buyers continue to circle the field, many utilities are holding on to their remaining overseas operations, waiting for brighter days, better prices, and better disposition opportunities. Some strategic

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