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Wall Street's Egalitarian View

Investors are making little distinction between regulated or unregulated business strategies. One banker suggests it will be difficult to stand out.
Fortnightly Magazine - April 2006

20 [thousand], 30 [thousand], or even 40,000 MW.”

On the customer side, 1 million customers used to be the benchmark for a good-size customer franchise. “Today, that number is 2.5 million and counting,” she says.

A lot of this consolidation has been due to M&A activity. Coben notes that about half of the largest companies have done major M&A transactions, and many of the others have been active acquirers on the asset side.

Moreover, as far as business strategy, if you look at the earnings makeup of the 10 largest utilities, “you can see that there is a good mix of regulated and unregulated businesses,” she says. And some of the largest utilities still are purely regulated and have made the decision to exit their non-regulated businesses. “So, clearly the large companies have the ability to choose where they focus strategically,” she notes.

Furthermore, Coben observes that with capital expenditures and credit requirements, and the costs to add generation for their regulated customers, many smaller companies have made the strategic choice that they need to focus purely on the regulated business.

“The top 10 companies are a mix between strongly regulated, strongly unregulated, and somewhere in between. When you get down to companies [ranked 22-30], very few of them have big non-regulated businesses.

“If you look at the few that have some, it is largely in the form of regulated generation that has been deregulated. Again, most of the midsize companies aren’t very aggressive in the non-regulated area any more.”

Coben states the non-regulated business is limited to some extent by the regulated business that tries to maintain balanced earnings and a good credit profile.

She says, “There is worry about regulatory claw-back of generation profits. They are making a lot of money on one side of the business through high commodity prices, and their customers are feeling pressure from the rates.

“Whether this model remains the model is one of the more interesting questions the industry will have to deal with. The other issue is whether they will get the same valuation in the market on balance or would the market want them to separate.”

That’s why it might be a good time to ask: Could spin-offs and carve-outs be the next act in the current merger wave?