cash flow

Professor Mark T. Williams goes in depth on the TXU leveraged buyout.

The consequences of a flawed strategic choice unfold slowly, but they carry great weight. Consider IBM, which in 1980 chose to outsource to Intel the 16-bit processor needed for its entry into the personal computer market. The Intel chip, however, could not use the operating system that IBM had designed for its older 8-bit processors. And so the company had to outsource the operating system as well as the chip—to a startup company called Microsoft.

It was the most anticipated energy deal in the New Year, but not for the usual reasons. The spin-off of Duke Energy’s natural-gas business into a stand-alone company, Spectra Energy Inc., peaked interest because the transaction was to have marked the vindication of the so-called “pure play” electric strategy. The deal also has captured attention because the spin-off represented a divestiture strategy that until now hasn’t been universally embraced, with gas assets still seen by some utilities as part of core operations.

A soup-to-nuts preview of the next 12 months that touches on spinoffs and interest rates, climate change and New Source Review, the future of nuclear, investor returns, and natural-gas price volatility.

Although total revenues were up by almost 5 percent for the third quarter of 2006 over Q3 2005, operating income and net income were up by 22.82 percent and 80 percent, respectively.

Average North America power-plant asset value is at $725/kW.¹ Compared with our winter 2005-2006 analysis, this figure has barely changed; however, we have seen significant value movements based on region, fuel, and asset types.

(November 2006) Our annual return on equity (ROE) survey broadly shows a continuing decline in the level of debate over issues specific to restructuring of the electric market. It also reveals a subtle shift back to investor requirements and overall business risks faced by regulated companies.

Does the utility industry have the financial strength sufficient to meet the combined challenges of: (1) sharply increasing and highly volatile fuel and purchased-power costs; (2) significant capital investment requirements; and (3) rising interest rates?

The search is on for the Holy Grail of risk management. Utilities are managing new risks, as more sophisticated systems and services become available.

Company leaders should expect to go through at least one company merger. If you’re in the energy industry, it’s time to begin pre-deal initiatives.