The Edison Electric Institute (NASDAQ:EEI) held its annual finacial conference in Florida last week, writes utility analyst Sandy Cohen. The EEI conference always has a theme ... and it is usually not the one the EEI tries to foster.
This year's theme, as set up by the EEI in its various panel discussions, was supposed to be about GROWTH: About how to sustain growth by utilities, and about how utilities can grow earnings through investment in their rate base.
Was this the actual theme we detected at this conference? Of course, we cannot pretend to know everything, or even a legitimate majority, of the talk that is actually going on around the conference. The conference has nearly every electric utility in the US, and perhaps a dozen international utilities, participating at the conference. It has over 1500 participants, usually, inclduing investors and sell-side analysts representing both the debt and the equity sides of the business. It has representatives from every major credit agency. It has dozens of investment bankers and consultants attending as well.
But we usually are able to get a general sense of the mood and thems swirling around the conference. We spoke to dozens of bankers, consultants, investors and sell-side analysts in our 3 days at the conference. We listened to 8 utilities formally present to the conference, and had visitation sessions with 15 or so additional utilities.
So ... what theme did we identify as the dominating theme? Simple ... one theme jumped out at us, as the topic the most utilities were talking about: Regulation.
And we are not talking about utilities pushing themselves more towards regulated businesses, and away from unregulated businesses, as we have seen at the last 2-3 conferences. No, we are talking about the natural consequences of that move away ffrom regulated businesses. Now that utilities are much more heavily reliant on a regukated environment and business to generate earnings, it is natural the lion share of their attention will be on regulatory relationships.
Out of 18 utilities who were able to tell us what their most pressing near- and long-term issues were, 14 mentioned Regulation or Regulatory Relationships (and 12 of those 14 mentioned Regulations as their most important issue). Of those companies, 7 mentioned the issue of addressing future Power Supply issues (the ability to add enough power to provide their customers with reliable power). And 4 companies mentioned that attending to, or dealing with, their unregulated businesses as a material issue over the near- and long-term (and all of those had problems in those non-regulated businesses that they had to deal with). The occasional company mentioned either environmental or financing issues as improtant issues (2 each).
What is interesting is that investors did not focus on these issues as much as the companies did. Sell-side analysts were more focused on the regulatory relationships and those issues than were investors. We sepculate that investors, in general, have not yet remembered the risk involved with relying on regulatory relationships for revenue and earnings growth.
We will post an article later this week on the risks of regulation, and what investors should look for as utilities face that risk over the next few years.
As a side bar, one of the themes that did NOT emerge, and was not talked about AT ALL, practically, was the issue of Mergers & Acquisitions. We did not hear any whispers about utilities merging, despite this beingt the 1st conference since the passage of the Energy Bill thios past summer. Many forecasted that that bill would spark a massive wave of consolidation and mergers, and bring a lot of new players into the industry to buy electric utilities. We felt at the time talk about mergers might be overblown ... but if not such activity would be bad for utility investors.
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