"We view the [Entergy-ITC] transaction [as] an attempt to extract excess value."-Mississippi PSC
Profit and the New Normal
Delivering value in a zero-growth market.
bring customers, scale, and capital (for R&D) to clean-tech targets that will, in turn, help them become the next generation clean energy majors. 11
As a note of caution, many utilities have destroyed value through M&A, as some utilities have failed to exploit all of their targeted post-M&A benefits in the form of improved efficiency (lower cost) and increased business and market effectiveness (greater competitiveness). Accordingly, plotting a clear path to extract value is critical, and top-performing, lower-cost utilities are on average much better at extracting value from M&A.
CEOs could also help maintain and grow the value of acquired assets through advanced portfolio management processes that rely on competencies such as real option planning, network modeling, and a strong understanding of market prices. Additionally, successful asset acquisitions require careful market timing. For example, many utilities lost out when they bought high and sold low to shore up extended balance sheets, especially with wholesale assets.
Picking the Right Approaches
Utility CEOs must lead the energy revolution, or they might find a future dictated by others—policymakers, non-traditional suppliers, and consumers. With so much complexity and uncertainty, the answer for any given utility will vary, and moving forward is about getting the strategic imperatives right for the company, achieving operational excellence, and then ensuring the proper functional support to enable the chosen market approach.
To get there, many utilities will need to re-think their business model. Again, multiple scenarios are possible. Sustained low prices for natural gas could force major resourcing and operational shifts. Predominantly electric utilities could enter the gas pipeline market to hedge their portfolios. Retail-ization might present opportunities for unique relationships with other retailers, potentially leading to new lines of business and revenues. Some utilities might restructure their portfolios and financing structures by unbundling their transmission assets into REIT-type structures. Continued cost-cutting and creative sourcing might help utilities to find the loose change sitting inside their own four walls, which, in some cases, can add up to significant value ( i.e., enough to affect EPS).
Leaders have an opportunity to determine where, across the spectrum of options, to place bets going forward, as well as where and how those bets could change over time. It’s a balancing act, and utilities will have to push limits and exploit various resources and channels that drive their business—for example, how to get the most out of (and working with) regulators, customers, assets, new fuels, new technologies, and evolving profit and loss and balance sheets. It will be a risky voyage for all and a rewarding one for some.
1. “ Shrinking demand growth may be new normal ,” Megawatt Daily , Jan. 14, 2013.
2. “ U.S. power industry to invest $85 bln annually in electric grid ,” Reuters News , Feb. 6, 2013.
3. “ Green REITs, MLPs, and Up-Cs: Tax-efficient capital vehicles for unregulated utility investments ,” Fortnightly’s Spark, May 2013.
5. “ Rooftop Revolution, Changing Everything with Cost-Effective Local Solar ,” March 2012, Institute for