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  • I am pleased to be on this panel as a representative of the financial community. Thanks to all the panelists for taking time out of their busy schedules to participate in this unique discussion. Also, Bob Gee deserves special acknowledgement for arranging all of this today. In this short presentation I wanted to briefly discuss two strategic dynamics affecting the Power and Utility Industry. Since our firm has helped restructure or is restructuring many of the troubled companies in the Industry, I will say a word or two about the restructuring/credit environment for those companies. Second, since our firm is ultimately and strictly an advisory firm principally focused on mergers and acquisitions, I will also communicate a few thoughts on mergers and acquisitions. As we have believed for some time, it remains our view that the Industry is a fundamentally consolidating one, with some of the best constituency value opportunities residing in logical, well-executed mergers.
  • The box on this slide, with its inputs, represents our views of the material factors affecting the Industry today and strategies that may allow participants to meet the challenges and opportunities suggested by the inputs. While I suspect all of these, and other factors, will be considered during the course of our discussions, I want to focus on a dynamic that leads us to the conclusion that appropriately structured Industry consolidation is consistent with the interests of relevant constituencies and may even be a useful public policy tool.
  • Utilities continue to trade at a significant premium to historical P/E multiples, though there has been some recent compression as interest rates have begun to rise in reaction to strengthening economic indicators. Despite the recent material correction in the market’s long-term earnings growth expectations, trading multiples until recently reacted inversely, underscoring the market’s recent (though abating) emphasis on yield. As the Industry continues to re-base its valuations along fundamental principles and macro-economic and Industry factors continue to normalize, the Industry, generally, and particularly those utilities that recently enjoyed significant premiums, will likely trend toward more historical levels, although President Bush’s tax cut should offset this downward pressure to some extent.
  • As the hoped-for growth prospects of previous strategies have largely failed to materialize, companies are investigating several strategies intended to restore moderate earnings growth, all with a view to the income focus of the investor community. The predominant strategy over the past 12-18 months has been a “Back-to Basics” approach. Some companies which have largely completed their “Back-to-Basics” efforts are now investigating strategies designed to produce long-term growth at rates higher than those available solely through cost-cutting, etc. The Regulated Growth Strategy incorporates an increased focus on the core regulated business; maximizing the value of existing assets and investigating ways to grow the regulated asset base. This strategy has become one that more and more Industry observers are discussing as an attractive source of growth. And it is – if regulators allow a reasonable rate of return. However, there are two aspects of this strategy worth mentioning. First, this strategy may require rate increases which are difficult as we all know. Second, robust rate base investment cannot continue perpetually as prudent investment opportunities are limited. Others are pursuing strategies which we refer to as Specialized Growth Strategies. These Strategies range from conservative generation or merchant strategies, including wind, to LNG and, increasingly, consolidation. Each of the companies pursuing these strategies appears to be doing so in a way that is measured.
  • While some companies may be able to cobble together a growth-enhancing strategy based on “Back-to-Basics” and selected forays in the non-regulated and regulated area, we believe that consolidation in the Industry, while fraught with execution risk, should continue to provide the best long-term value proposition for companies and, as a result of reasonably attainable synergy levels, very attractive relative earnings growth opportunities. Today, as evidenced by the various colors on the map, the Power and Utility Industry remains markedly unconsolidated, suggesting the opportunity. Importantly, as one reviews this multi-colored map, it is reasonable to ask the question as to whether the various companies that are present in the map, taken together with municipal-owned entities and cooperatives and others, somehow increases the complexity of this country’s utility and power system and thus puts pressure on the ability to deliver reliable electricity service.
  • In the wake of last summer’s blackout, the topic of system reliability has demanded the attention of policymakers, advocacy groups and Industry executives. In addition to considering whether the fragmented nature of the Industry itself may contribute to reliability questions, we have been considering whether consolidation itself could be a source of capital for the apparent significant investment needs to ensure infrastructure reliability. In our view, the available synergies associated with mergers in the Industry could be utilized, in part, to support investment in the system which, as noted on this slide, could be a win-win result for all constituencies. In particular, assuming a reasonable regulatory construct, some portion of synergies associated with a merger could be allocated to shareholders with the balance allocated to system investment, as apposed to being allocated to rate decreases, thereby locking-in enhanced future earnings growth for the relevant utility and greater system reliability as a result of enhanced investment. In your copies you will find an article we recently published in Public Utilities Fortnightly on this topic.
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    1. 1. Utility Commissioners / Wall Street Dialogue Hyatt Regency Jersey City December 10, 2004
    2. 2. Utility Commissioners / Wall Street Dialogue The Investment Bankers’ Perspectives on Regulation and the Utility Business
    3. 3. Investment Banker’s Perspective on Regulation and the Utility Business December 2004 Tom Osborne STRICTLY CONFIDENTIAL
    4. 4. Who is UBS? <ul><li>Presence in all major financial centers worldwide </li></ul><ul><ul><li>1,500 offices in 50 countries </li></ul></ul><ul><li>Superior credit ratings from all major agencies </li></ul><ul><ul><li>Fitch—AA+  </li></ul></ul><ul><ul><li>S&P—AA+ </li></ul></ul><ul><ul><li>Moody’s—Aa2 </li></ul></ul><ul><li>Invested assets of US$1.78 trillion </li></ul><ul><li>Nearly 65,929 employees globally </li></ul><ul><ul><li>39% in the US </li></ul></ul><ul><li>Market capitalization of US$83 billion </li></ul><ul><li>Shareholders’ equity of US$29.6 billion </li></ul><ul><li>ROE of 31.9% (before goodwill) </li></ul>Investment Banking Equities FIRC (Fixed Income, Rates and Currencies) Private Equity (executed as UBS Capital) Wealth Management and Business Banking Private and Corporate Clients Institutional Asset Management Mutual Funds A global, integrated investment services firm
    5. 5. UBS Global Power Group <ul><ul><ul><li>UBS is a leader in marketed common stock offerings in the utility sector </li></ul></ul></ul><ul><ul><ul><ul><li>ranked #1 by total proceeds in the last five years </li></ul></ul></ul></ul><ul><ul><ul><ul><li>participated in more than 90 marketed utility common stock offerings </li></ul></ul></ul></ul><ul><ul><ul><ul><li>raised more than $35 billion in common equity offerings globally </li></ul></ul></ul></ul><ul><ul><ul><li>Over the past five years, UBS has participated in more than 290 utility debt offerings </li></ul></ul></ul><ul><ul><ul><ul><li>ranked #6 by total proceeds </li></ul></ul></ul></ul><ul><ul><ul><ul><li>raised more than $113 billion in debt securities globally </li></ul></ul></ul></ul><ul><ul><ul><li>In the past 10 years, UBS has advised on over $90 billion of M&A and advisory assignments in the US utility sector </li></ul></ul></ul>
    6. 6. The Role of Investment Bankers I ntermediary Investment Bankers Principal Research Brokers Capital Markets Sales & Trading <ul><li>Equity </li></ul><ul><li>Debt </li></ul><ul><li>Risk Management </li></ul><ul><li>FX/Commodities </li></ul>Advisory <ul><li>Mergers & Acquisitions </li></ul><ul><li>Corporate Finance </li></ul><ul><li>Restructuring </li></ul><ul><li>Capital </li></ul><ul><li>Risk Assumption </li></ul><ul><li>Proprietary Trading </li></ul>Corporations Governments Financial Institutions Private Equity Sponsors Clients (…need capital) Retail Investors Individuals Investor Clients (…have capital ) Institutional Investors Mutual funds Pension funds Hedge funds Asset Management
    7. 7. Investor Perception of the Industry: Impaired but Improving Shift in value drivers, with the industry implementing a back-to-basics strategy
    8. 8. Sources of Funding Equity and Debt issuances reflect utilities’ needs and investors’ appetite Investment Grade Debt Common Equity High Yield Debt Convertible Securities US10YR
    9. 9. Investors See Significant Risks Business Risks <ul><ul><ul><li>Regulatory and legislative uncertainty </li></ul></ul></ul><ul><ul><ul><li>Need for infrastructure investments </li></ul></ul></ul><ul><ul><ul><li>Pressure to improve reliability </li></ul></ul></ul><ul><ul><ul><li>Variable economic conditions/fluctuating demand </li></ul></ul></ul><ul><ul><ul><li>Increased exposure to volatile fuel and commodity markets </li></ul></ul></ul><ul><ul><ul><li>Lack of certainty around forward curves </li></ul></ul></ul><ul><ul><ul><li>Higher counterparty risk </li></ul></ul></ul><ul><ul><ul><li>Customer and/or asset concentration </li></ul></ul></ul><ul><ul><ul><li>Competitive pressures </li></ul></ul></ul><ul><ul><ul><li>Weak spark spreads caused by persistent generation oversupply in selected markets </li></ul></ul></ul><ul><ul><ul><li>Rising costs (fuel, pension, insurance, O&M) </li></ul></ul></ul><ul><ul><ul><li>Rate setting cycle </li></ul></ul></ul>
    10. 10. Investors See Significant Risks Financial Risks <ul><ul><ul><li>Overleveraged balance sheets </li></ul></ul></ul><ul><ul><ul><li>Volatile interest rates </li></ul></ul></ul><ul><ul><ul><li>Timely return on/of capital </li></ul></ul></ul><ul><ul><ul><li>Ability to attract capital to fund critical infrastructure improvements </li></ul></ul></ul><ul><ul><ul><li>Form of return (dividend versus growth) </li></ul></ul></ul><ul><ul><ul><li>Increasingly stringent rating agency standards </li></ul></ul></ul>
    11. 11. Rating Agency Shift <ul><ul><ul><li>Wider latitude to make judgment calls away from financial metrics </li></ul></ul></ul><ul><ul><ul><li>Reduced number of credit metrics </li></ul></ul></ul><ul><ul><ul><li>Raising the bar via “Business Position” rankings </li></ul></ul></ul>Focus on qualitative issues in addition to quantitative
    12. 12. Cost of Capital Reflects Perception of Risk Note: 1 Utility S&P credit rating index spread against the 10-Year Treasury Utility Credit Spread 1 Source: S&P, Bloomberg Companies with lower credit ratings have higher and more volatile cost of capital Utility Ratings - Sep 2001 Utility Ratings - Sep 2004
    13. 13. Cost of Equity <ul><li>Investors expected to focus on total return anchored by a strong dividend yield </li></ul><ul><li>If historical relationships hold, multiple compression may occur given interest rate forecasts </li></ul><ul><ul><li>an R-square statistic of 78.9% suggests high correlation between Treasuries and P/Es over the last 27 years </li></ul></ul>P/E Analysis Credit strength and financial flexibility will continue to be focal points 4.13% 12.5x 5.30% 14.4x
    14. 14. Regulation vs. Perceived Risk in the Utility Industry 1 4 7 10 13 0 1 2 3 4 6 7 8 State Regulatory Rating Corporate Credit Rating Average Below Average AA A BBB BB B Above Average Source: Analysis includes 94 utilities. Credit ratings by S&P as of 10/7/04. State Regulatory Ratings by Regulatory Research Associates as of 4/12/04 Utilities operating under constructive regulatory environments have received better credit ratings 1 3 5 2 1 2 3 2 1
    15. 15. Avoiding the Vicious Cycle of Under-Recovery Restricted access to capital Higher borrowing costs Weaker credit metrics Need for rate increases beyond original amount Less-than-adequate returns and under-recovery of prudent costs Shift in business-risk perception makes this all the more crucial
    16. 16. <ul><ul><ul><li>During the merchant energy boom, investors and lenders offered aggressive transaction terms </li></ul></ul></ul><ul><ul><ul><li>Forward power curves have changed </li></ul></ul></ul><ul><ul><ul><li>Market requirements increase costs: </li></ul></ul></ul><ul><ul><ul><ul><li>higher degree of contract coverage </li></ul></ul></ul></ul><ul><ul><ul><ul><li>thicker layer of equity </li></ul></ul></ul></ul>No More “Trust Me” Initial Financing 2000 Refinancing 2004 Case Study: Calpine Construction Finance Company II (CCFCII) Investors are unwilling today to fund fully merchant activities
    17. 17. Regulatory & Legislative Wild Cards Regulatory <ul><ul><ul><li>National Energy Policy </li></ul></ul></ul><ul><ul><ul><ul><li>RTOs </li></ul></ul></ul></ul><ul><ul><ul><li>Genco market power analysis and ratebasing of production assets </li></ul></ul></ul><ul><ul><ul><li>Recovery of purchased power costs </li></ul></ul></ul><ul><ul><ul><li>Incentives for investment </li></ul></ul></ul><ul><ul><ul><li>Performance-based ratemaking </li></ul></ul></ul>Legislative <ul><ul><ul><li>National Energy Policy </li></ul></ul></ul><ul><ul><ul><li>Environmental controls </li></ul></ul></ul><ul><ul><ul><li>PUHCA reform </li></ul></ul></ul>
    18. 18. Balanced Regulation: An Investor’s Check List Yes <ul><ul><ul><li>Clear, consistent policy </li></ul></ul></ul><ul><ul><ul><ul><li>open access </li></ul></ul></ul></ul><ul><ul><ul><ul><li>recovery of known & measurable, prudently incurred costs </li></ul></ul></ul></ul><ul><ul><ul><li>PBR incentive mechanisms </li></ul></ul></ul><ul><ul><ul><ul><li>fuel cost sharing </li></ul></ul></ul></ul><ul><ul><ul><ul><li>potential for upside </li></ul></ul></ul></ul><ul><ul><ul><li>Timeliness </li></ul></ul></ul><ul><ul><ul><li>Integrated Resource Planning </li></ul></ul></ul><ul><ul><ul><ul><li>PPAs and generation additions </li></ul></ul></ul></ul><ul><ul><ul><li>Critical investment incentives </li></ul></ul></ul><ul><ul><ul><ul><li>FERC transmission incentives </li></ul></ul></ul></ul><ul><ul><ul><ul><li>adequate returns on new generation </li></ul></ul></ul></ul>No <ul><ul><ul><li>Inconsistent or unclear policy </li></ul></ul></ul><ul><ul><ul><li>Under-recovery of costs </li></ul></ul></ul><ul><ul><ul><li>Regulatory lag </li></ul></ul></ul>Risks are rising: Regulators play a crucial role in managing those risks
    19. 19. <ul><li>This presentation has been prepared by UBS securities LLC (“UBS”) for the exclusive use of recipient (together with its subsidiaries and affiliates, the “company”) using information provided by the company and other publicly available information. UBS has not independently verified the information contained herein, nor does UBS make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this presentation. Any estimates or projections as to events that may occur in the future (including projections of revenue, expense, net income and stock performance) are based upon the best judgment of UBS from the information provided by the company and other publicly available information as of the date of this presentation. There is no guarantee that any of these estimates or projections will be achieved. Actual results will vary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past or future. UBS expressly disclaims any and all liability relating or resulting from the use of this presentation. </li></ul><ul><li>This presentation has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The company should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. The company should consult its own counsel, tax and financial advisors as to legal and related matters concerning any transaction described herein. This presentation does not purport to be all-inclusive or to contain all of the information which the company may require. No investment, divestment or other financial decisions or actions should be based solely on the information in this presentation. </li></ul><ul><li>This presentation has been prepared on a confidential basis solely for the use and benefit of the company; provided that the company and any of its employees, representatives, or other agents may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to the company relating to such tax treatment and tax structure. Distribution of this presentation to any person other than the company and those persons retained to advise the company is unauthorized. This material must not be copied, reproduced, distributed or passed to others at any time without the prior written consent of UBS. </li></ul>
    20. 20. Contact Information UBS Securities LLC 299 Park Avenue New York NY 10171 Tel. +1-212-821 3000 UBS Investment Bank is a business group of UBS AG UBS Securities LLC is a subsidiary of UBS AG
    21. 21. Regulation and the Utility Business <ul><li>An Investment Banker’s Perspective </li></ul><ul><ul><li>December, 2004 </li></ul></ul><ul><ul><li>Jay Dobson </li></ul></ul><ul><ul><li>Deutsche Bank </li></ul></ul>
    22. 22. Deutsche Bank <ul><ul><li>One of the leading international financial service providers with about EUR900 billion of assets </li></ul></ul><ul><ul><li>66,750 employees in 74 countries serving over 21 million customers </li></ul></ul><ul><ul><li>Significant investment banking practice in the US, Europe and Asia </li></ul></ul><ul><ul><li>Over 11,000 employees in the US focused on financial services and investment banking </li></ul></ul>
    23. 23. Global Energy and Utilities <ul><ul><li>Deutsche Bank has approximately 300 investment banking professionals focused on the energy and utility industries globally </li></ul></ul><ul><ul><li>Deutsche Bank is a leading manager of investment grade debt, high yield debt, equity and related derivative/structured products for the utility industry </li></ul></ul><ul><ul><li>Recently represented financial sponsors in acquisition of Texas Genco in $3.6 billion transaction </li></ul></ul><ul><ul><li>Extensive commodity trading business, currently well positioned to hedge commodity price risk and intermediate credit risk </li></ul></ul>
    24. 24. Communication is the Foundation Electric Utilities Investment Banks and Investors Regulators
    25. 25. Presentation Outline <ul><ul><li>There is a growing need for infrastructure investment in the US electric utility industry </li></ul></ul><ul><ul><li>Some of this investment will need to rate base treatment </li></ul></ul><ul><ul><li>Constructive regulation and good management reduces investor risk and therefore the cost of capital in the long term </li></ul></ul><ul><ul><li>Observations on the future of the industry </li></ul></ul>
    26. 26. Infrastructure Investment 2005 – 2015 <ul><ul><li>Transmission expansion and upgrades </li></ul></ul><ul><ul><li>Environmental controls to reduce pollutants </li></ul></ul><ul><ul><li>New generation supply </li></ul></ul><ul><ul><li>Technological improvements at the customer interface </li></ul></ul>
    27. 27. Transmission <ul><ul><li>Additional transmission investment necessary to eliminate bottlenecks and other system constraints </li></ul></ul><ul><ul><li>Growing demand for power requires investment in transmission system expansion </li></ul></ul><ul><ul><li>Increasing size of regional power pools would reduce power prices, but will require transmission investment </li></ul></ul><ul><ul><li>Utilization of new technology to control power flows and increase line capacity/reduce line loss is necessary </li></ul></ul>
    28. 28. Environmental Controls <ul><ul><li>Long-term necessity to continue to reduce pollutant emissions at US power plants </li></ul></ul><ul><ul><ul><li>SO2, CO2, NOx, mercury, particulates </li></ul></ul></ul><ul><ul><li>Additional federal legislation likely eventually </li></ul></ul><ul><ul><li>Could prompt retirement of high pollution, low efficiency plants despite low level of investment net of depreciation </li></ul></ul><ul><ul><li>Long-term approach has the ability to reduce costs through the use of technology and innovation </li></ul></ul>
    29. 29. Generation <ul><ul><li>New supply needs to be added to meet load and increase efficiency/reduce emissions </li></ul></ul><ul><ul><li>With two year planning and permitting lead time, new adds need to begin soon </li></ul></ul><ul><ul><li>Technological alternatives to gas like IGCC are almost economic </li></ul></ul><ul><ul><li>Regulated or deregulated </li></ul></ul>
    30. 30. Customer Interface <ul><ul><li>Automated meter reading </li></ul></ul><ul><ul><li>Load control </li></ul></ul><ul><ul><li>Two-way communications with customers </li></ul></ul><ul><ul><li>Desire to increase customer satisfaction </li></ul></ul>
    31. 31. Investment Leads to More Rate Cases Capital Investment Regulatory Approval Earnings Cash Flow ROE Rising Demand
    32. 32. Nominal vs. Real Price of Retail Electricity cents/kWh
    33. 33. How to Reduce Long-Term Cost of Capital <ul><ul><li>Constructive regulation that appropriately values risk </li></ul></ul><ul><ul><li>Management incentives to reward good management and recognize bad management </li></ul></ul><ul><ul><li>Communication between all parties is a critical foundation for low cost of capital </li></ul></ul><ul><ul><li>Cooperative regional approach to infrastructure </li></ul></ul>
    34. 34. Themes for 2005 to 2010 <ul><ul><li>The real price of electricity for consumers will be rising, leaving regulatory risk high but improving chances that regulators will support industry consolidation and rational synergy cost sharing </li></ul></ul><ul><ul><li>Major investments will be made in utility infrastructure and rate base assets, particularly in transmission and distribution </li></ul></ul><ul><ul><li>Environmental rules will become more strict, helping nuclear and coal gasification and leaving natural gas fired capacity on the margin in most regions </li></ul></ul><ul><ul><ul><li>Environmental control costs will add to rising capital expenditures </li></ul></ul></ul>
    35. 35. Themes for 2005 to 2010 <ul><ul><li>Spark spreads will recover and building programs will resume in selected regions </li></ul></ul><ul><ul><li>LNG imports will add supply, but demand growth will be higher, keeping gas prices and volatility relatively high </li></ul></ul><ul><ul><ul><li>Permitting and siting complications for LNG facilities could delay real impact on US commodity prices until late in the decade </li></ul></ul></ul><ul><ul><li>Deregulation will resume late in the decade, spurred by improvements in wholesale electricity markets </li></ul></ul><ul><ul><li>PUHCA will be repealed and industry consolidation will resume </li></ul></ul><ul><ul><ul><li>Regulatory control will be resolved with states maintaining influence </li></ul></ul></ul><ul><ul><ul><li>Synergy sharing will be more favorable </li></ul></ul></ul>
    36. 36. CURRENT TRENDS IN THE POWER & UTILITY INDUSTRY CONFIDENTIAL December 2004 James F. von Riesemann Vice President, Lazard Freres & Co. LLC
    37. 37. Current Strategic Challenges and Opportunities 1
    38. 38. Industry Valuation Drivers: Dividend Yield, LT Growth and Total Return 2
    39. 39. Value Compression Dynamics: Current Premium Industry Valuations 3 <ul><li>Source: FactSet and I/B/E/S. </li></ul>
    40. 40. Current Business Models 4
    41. 41. Industry Valuation Drivers: Long-Term Growth 5 (a) Based on rounded Lazard Core Utility Index median. As interest rates rise and dividend yield alone is no longer able to sustain current premium Industry valuations, investors will again begin to discriminate more on the basis of utilities’ total return propositions
    42. 42. Consolidation Strategy: A Fundamentally Consolidating Industry 6 (a) Includes 66 Electric Investor-Owned Utility Holding Companies.
    43. 43. Benefits <ul><li>SynergiesCost </li></ul><ul><ul><ul><li>Savings may help support &quot;funding&quot; of necessary investment infrastructure </li></ul></ul></ul><ul><ul><li>Fill growth gap </li></ul></ul><ul><ul><li>Portfolio diversity </li></ul></ul><ul><ul><li>Regulatory diversity </li></ul></ul><ul><ul><li>Enhance management, address succession issues </li></ul></ul><ul><ul><li>May reduce cost of capital </li></ul></ul><ul><ul><li>Enhance balance sheet and investment flexibility </li></ul></ul><ul><ul><li>Equity premium considerations (Modified MOE or acquisition) </li></ul></ul><ul><ul><li>Market acceptance of recent mergers </li></ul></ul><ul><ul><li>Sector valuation </li></ul></ul><ul><ul><li>Benefits of scale (generation, trading and marketing, retail, cost of capital, absorb errors, etc.) </li></ul></ul>Consolidation Strategy: Competing Considerations
    44. 44. Issues <ul><li>Synergy sharing / “clawback” </li></ul><ul><li>Regulators may negate rationale for merger </li></ul><ul><li>Federal regulatory uncertainty </li></ul><ul><li>Transmission policy </li></ul><ul><li>Market power </li></ul><ul><li>Growth gap not permanently filled </li></ul><ul><li>Some diversity may create more issues than benefits (e.g. lack of familiarity with new regulators) </li></ul><ul><li>Time to close (especially relates to regulatory delay) </li></ul><ul><li>Headquarters issues </li></ul><ul><li>Management issues </li></ul><ul><li>Historical issues </li></ul><ul><li>Quality of currency received; evaporating premium </li></ul><ul><li>Market focus on yield, back-to-basics </li></ul><ul><li>Strategic imperative not “life or death” </li></ul><ul><li>Sector valuation </li></ul>Consolidation Strategy: Competing Considerations
    45. 45. Electric Reliability: The Merger Solution <ul><ul><li>One “win-win” solution would be to create a comprehensive regulatory environment supportive of utility consolidation that directs a significant portion of the derived merger synergies toward infrastructure investment </li></ul></ul><ul><ul><ul><li>If 50% of merger synergies were directed towards investment in reliability and the top 100 utilities merged to create only 50, it could result in as much as $50 billion in derived cost synergies allocated towards system investment </li></ul></ul></ul><ul><ul><li>In an environment with many pressures that may otherwise require rate increases, rate increases to fund investment may be politically challenging </li></ul></ul><ul><ul><li>Directing the shared cost savings in a merger could, therefore, create benefits for all constituencies </li></ul></ul><ul><ul><ul><li>Regulators: achieve significant reliability spending while avoiding/mitigating rate increases </li></ul></ul></ul><ul><ul><ul><li>Ratepayers: avoid shouldering the entire burden of infrastructure investment </li></ul></ul></ul><ul><ul><ul><li>Utilities and shareholders: benefits of cost efficiencies, economies of scale and improved financial strength </li></ul></ul></ul><ul><ul><li>Investment ultimately requires an appropriate return; if rate increases are unpalatable, then access to the embedded economies of scale from Industry consolidation could ease the burden of infrastructure investment and create benefits through further system reliability and financially stronger utilities </li></ul></ul>8