PRINT THIS PAGE Which way to value energy and utilities?
25/04/2006. Source:Deloitte.
Power and utility executives and their PE backers tend to share certain assumptions about what will drive value creation over the next five years. However, this study by Deloitte Research, including interviews with 40 industry executives, regulators, financiers, and environmentalists, shows new challenges could be in store between now and 2010. The study highlights possible future scenarios for the industry:
- The Continuity Scenario: This is the majority view among executives, in which business conditions won't change much over the next five years.
- Tough Times and Rising Expectations Scenarios: Alternative views on what may lie ahead.
The Continuity scenario is not unreasonable. The assumptions that underlie it are corroborated by many projections and analyses from sources outside the industry. But the other scenarios have support as well. And if events unfold consistent with one of the alternative scenarios, power and utility companies could find themselves caught in a more turbulent business, with new risks affecting the availability and social acceptability of the fuels they use, the demand for the products they sell, the prices they charge their customers, and the returns they're able to offer investors.
Areas in which developments could differ from those assumed by most executives include economic conditions, rate regulation, environmental policy, natural gas prices, grid reliability requirements, and capital market priorities.
The problem is that no one can say with confidence which scenario is most likely. To resolve the strategy dilemma, the report recommends that companies make some degree of preparation for each of the three scenarios, using contingent investments that give them the ability to increase their stake in those that turn out to be well-suited to the conditions that materialize, while reducing or abandoning their stake in those that represent bets on futures that don't arrive. To the extent this entails extra expense, it can be viewed as the price of an option that is worth the additional flexibility it confers.
The report discusses how power and utility companies can redefine their strategies, increase returns from assets, and execute mergers and acquisitions effectively despite uncertainty over which scenario the next five years will most closely resemble
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© Deloitte & Touche, 2006
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