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Can utility executives find happiness in back-to-basics?
Fortnightly Magazine - March 2005

most of its debt at lower rates, the worry has now receded somewhat.

Last year, in our June issue, AEP CEO Michael Morris argued that the historical tie between utility stock valuations and interest rates should be put to bed.

"I think that tie isn't needed anymore," said Morris.

"That really is a historic tie that had so much to do with the building of a $4 billion power plant in the face of borrowing funds at kind of interest rates."

Furthermore, utility execs were skeptical because a successful merger is anything but easy to carry out. The so-called M&A answer, they said, would be difficult if not impossible to achieve in some cases, given the significant number of regulatory approvals and intense scrutiny associated with such transactions.

Many utility executives believe public policy issues will drive whether a regulator signs off on a merger deal. Even Jeff R. Holzschuh, head of the Global Energy and Utilities investment banking group at Morgan Stanley, predicted that, at best, two mergers greater than $10 billion would be announced in 2005, and perhaps two international acquisitions. So the notion that a wave of mergers is coming could be held by only the most optimistic banker or CEO.

Attorneys from LeBoeuf, Lamb, Greene and MacRae, a sponsor of the Exnet M&A conference, made clear the obstacles to clients:

"The primary motivating force in favor of strategic mergers," the firm says, "will be the pressures to find new sources of earnings growth but, as always, there will be countervailing pressures."

According to the LeBoeuf attorneys, regulatory uncertainty will give pause to potential M&A deal makers: "Where companies are contemplating rate cases in the near future, management may well decide to forgo merger discussions until after rate issues are resolved and valuations are more certain."

Lingering Doubts, for the Long Term

Nevertheless, even as executives at the meeting saw the promise of modest gains for the coming year, it was painfully clear to many that the electric utility industry will see precious few growth options over the long term.

Today, after having lost billions, investors say (and so do the now-risk-averse directors at the utilities themselves), that they will not support unregulated growth initiatives, such as merchant power, energy trading, international ventures, telecom investments, or adventures in retail competition.

Yet the temptation is always present and cannot be dismissed entirely.

Paul J. Bonavia, president - Commercial Enterprises at Xcel Energy, took the Exnet audience through the industry's missteps in insurance and banking during the 1980s, and then through the all too familiar merchant years of the 1990s. In the end, he framed the utility executive's growth dilemma perfectly.

"We are back to our utility executive, who has had a flirtation with banks, insurance, and has gone off to China and got a certificate in [Guangdong] Province to build a coal plant, or bought something exciting in Argentina or Australia.

"Management is still looking for the Holy Grail. What do you do? We're going to be plain-vanilla utilities."

He said utilities would have no choice but to focus on