Wall Street wants utilities to return to basics, but the CEOs worry it won't be enough.
Richard Stavros is the Executive Editor of Public Utilities Fortnightly.
One can certainly understand why so many utility chiefs steered their companies back to basics over the past two years. They read the newspapers. They knew what the financial community was saying. Investors and debt-rating agencies might have overreacted, I suppose. Some on Wall Street seem to think so. Not all utilities should have been downgraded or downsized, they argue. Not all business plans were suspect. Yet some energy companies certainly deserved to be investigated and downgraded. Or even bankrupted.
But a key problem remains. As the economy improves, utilities recognize they must soon return to the front lines and face the music. How do they generate enough growth to keep investors from being lured away by higher-yielding financial instruments such as U.S. treasuries (interest rates are on their way up) or competing equities with higher-paying dividends-all while remaining to appear as stable, low-risk investments?
While attending a utility industry conference last month in New York City, sponsored by an investment bank, most executives told me this issue would occupy utilities for the next 12 months. They suggest that merger deals will offer the only likely and available route to sustained growth. They say that the common strategy of combining energy trading, international ventures, and retail power distribution has been discredited because of the huge financial losses that utilities have suffered.
This recommended flight to M&A deals should not surprise anyone. Who can argue with the logic of consolidation and greater earnings growth through cost cutting and economies of scale? Naturally, these bankers echo what they believe is possible in the current investment environment.