A Moody's Investors Service report, Moody's Assesses Risk in Utility Combinations and Spin-Offs, finds that mergers and acquisitions (M&A) do not mitigate the higher business risk posed by electric deregulation. The report also claims that financial risk only declines to the extent that management uses merger-related savings to reduce leverage.
Utilities pursue mergers to boost shareholder returns; regulators approve mergers to secure benefits for customers, such as lower rates. Bondholders run a distant third. M&A that positions the company to disaggregate may increase risk for bondholders who may find themselves holding only liens on generating assets, which Moody's finds of "questionable value" in a deregulated market.
While merger-related cost savings can be significant (em typically estimated at between $400 million and $1 billion (em Moody's finds such savings limited in the near term to cuts in nonfuel operation and maintenance and in interest expenses, which represent a mere 38 percent of total generating costs. According to Moody's, a significant portion of these savings could be achieved without M&A because a large portion of merger-related savings often goes to offset transaction expenses. (em LB