Growth Strategies on the Ropes

I recently received word of a takedown over at Pacificorp, Portland, Oregon, U.S. It seems that subsidiary Pacificorp Power Marketing ran up a US$151 million third quarter loss. This loss occurred primarily due to price spikes (up to US$7000/MW) that occurred this summer. Market prices for electricity escalated due to an unusual combination of events. A heat wave in the Midwest drove energy usage higher at the same time power lines and power stations were out of service due to recent summer storms. Add in the effects of lost generation from off-line nuclear plants and the end result was the meltdown of an otherwise profitable marketing and trading enterprise.

But that isn't the end of the bad news for Pacificorp.

It seems the company also ran into trouble with international diversification efforts. This August, CEO Fred Buckman resigned in the face of poor financial performance. Buckman's diversification strategy is being dismantled by present CEO Keith McKennon, who stated that the company had spent a lot of time and money trying to transform into a global energy company without success. McKennon is reversing the initiatives of his predecessor, selling off power stations and distribution companies purchased in the United States, Turkey, the Philippines and Australia.

Other unregulated utility businesses are facing similar risks out on the open market. Consider Entergy, New Orleans, Louisiana, U.S. This utility was pursuing a broad diversification and expansion effort to enhance revenue growth. Not all went as planned, and Entergy faced shareholders upset with disappointing earnings and lagging stock performance. CEO Ed Lupberger was encouraged to take early retirement earlier this year. Wayne Leonard, recently named to the top spot at Entergy, is reversing direction by selling off assets including an energy services company in the United States and a power distribution company in Australia. Last month, Entergy announced the sale of recently purchased distribution company, London Electricity, to global powerhouse Electricit de France. Proceeds of the sale will be used to repay debt incurred in the purchase of London electricity.

Moody's Investment Service confirmed the existing ratings of Entergy at Baa3 but acknowledged that ratings will stay negative until management clarifies its strategy to improve the credit profiles of each individual subsidiary.

Entergy's Leonard has also decided to refocus management's attention on the core business of providing electricity to customers. Leonard acknowledges that customer service had slipped to unacceptable levels in some of Entergy's service areas. He is committed to refocusing the company to assure the delivery of reliable electric power, believing there is no more important issue than keeping the 2.5 million customers Entergy serves today.

One utility that decided not to travel the diversification route is Sierra Pacific, Reno, Nevada, U.S. While other utilities announce joint ventures, tout trading companies and attempt to sell high-dollar services to big businesses, Sierra Pacific decided to stick with the power-delivery business. In a recent interview with Reuters News Service, CEO Malyn Malquist stated, "It might be boring to some people, but we see ourselves as a middleman for meeting customers' energy needs." Sierra Pacific is committed to growing its delivery business in an effort to generate the returns its investors expect. The company is bidding to purchase distribution territory in northern California that Pacificorp recently put up for sale.

The company is also in the process of merging with neighboring Nevada Power to create Sierra Pacific Resources. The combined company will serve 800,000 electric and 100,000 gas customers in Nevada and portions of California. This service territory will serve an area that is experiencing load growth of 6%, the highest rate in the country. If the merger goes through, expect the combined company to sell generation assets. CEO Malquist believes that selling off generation is inevitable as regulators continue to discourage wires companies from owning generation assets.

We are now seeing the financial consequences of earlier decisions to diversify. Some utility subsidiaries are reaping the rewards of diversification efforts, but many more are feeling the sting of financial reversals. We'll have to wait and see if Sierra Pacific's strategy to stick to the basics will reward investors with better financial results. The electric utility industry promises to deliver more bumps and bruises, and we'll see other utility executives go down for the count. But one thing is sure: all utilities must strap on their boxing gloves and get in the ring. A competitive world demands no less.

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