Diversified assets swell, returns lag

By Dana Bacciocco, Associate Editor

While trading and marketing operations tend to overshadow many utilities’ other subsidiary businesses, they are not necessarily the most profitable business units.

Although deregulation has driven most significant top line growth from energy trading and marketing, an additional $80 plus billion in revenues were generated by investor owned utilities (IOUs) from other diversified business holdings, according to the latest C Three Group annual analysis of diversified businesses of the largest 76 U.S. IOUs.

Returns for these businesses on aggregate are improving, according to analysts, but still have not reached the returns seen from traditional utility businesses. Total assets of these 76 companies now exceed $1 trillion, 26 percent more than in 1998 and 9 percent more than year-end 2000. Notably, virtually all growth in the asset base has been outside the core regulated businesses. While revenues of the top 76 IOUs leapt from $375 billion in 1998 to more than $652 billion in 2000, aggregate net income for the group increased at a much slower pace, from $17 billion to about $19 billion.

Some firms have enjoyed success by acquiring energy services companies (ESCOs) and HVAC-a growing phenomenon. Performance contracting, energy services, HVAC contracting and energy procurement present new opportunities for some veteran players. Some companies are splitting the difference and homing in on services only. Venture capital investments by utilities, either directly or through funds, saw huge growth over the past two years.

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Looking at revenue and net income by major business segment, it is clear that trading dominates; however, the regulated side of business provided the lion’s share of net income (see Figure).

Dramatic growth in energy marketing and trading during the past three years is tempered in that the top eight companies controlled over 82 percent of the 2000 market.

Note: Numbers used in analyses are “as reported,” and there was a great deal of discrepancy in how companies segregated their segment information.

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