Investors have been drawn to the generally stable returns, lower cost of capital, and intriguing new investment opportunities electric utilities may present.
Recent examples include planned or consummated acquisitions of Pepco Holdings, UniSource Energy Holdings (owner of Tucson Electric Power), and Nevada Energy. Despite the recent fervor, we see many reasons for investors to be cautious. While an acquired utility may deliver all of the promised returns to an investor, there are credible reasons why it may not. This could include a fickle customer base unwilling to support new technology investments that require rate increases, a regulatory environment that does not embrace advanced concepts in cost recovery, or an aging generation fleet experiencing increasing failures and driving up cost. Understanding how these and other uncertainties could affect the utility’s performance is critical to evaluating an investment target.
In this paper, we focus on five key questions that every strategic or financial investor should ask about a utility target. These questions focus on aspects of the utility’s business that, from our experience, have been overlooked or not fully addressed by potential investors. These latent risks may have significant implications for an investor’s valuation of a utility and should be fully understood and integrated into the analysis.
