Frontlines

The pros and cons of selling the transmission system.

For an electric utility these days, selling the dry-as-toast wires business can seem awfully tempting. CMS thought so. It took in $290 million (or 1.2 times book value) for selling its transmission system. Trans-Alta pocketed even more-1.4 times book ($560 million). The buyer in each case was Trans-Elect. But then DTE garnered a whopping $610 million-1.5 times book-in selling the Detroit Edison grid system to Kohlberg, Kravis, Roberts & Co. (KKR), kings of the leveraged buyout. Not to be outdone, Trans-Elect has now offered to pay 1.6 times book ($239 million) for Illinois Power's transmission lines, but that deal may have run into some snags on the regulatory front.

With prices like these, how could any utility choose to sit on the sidelines, spurning all that cash when the opportunity might not come again? Yet there has been no rush to sell. The tax liability appears daunting, given all those years of depreciation deductions. And then there is the question of what to do with the money, and the implications for the future health of the utility company, not to mention how shareholders and ratings agencies will view the sale.

Selling Isn't for Everybody

Morgan Stanley's Gary S. Barancik, a managing director in the bank's global energy and utilities group, agrees that the selling of transmission assets is not going to be a winning proposition for every utility. The utilities most likely to sell are those that have liquidity issues, or those that will otherwise lose control over the asset, as it will become part of an ISO or RTO.