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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.
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