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Non-Core, International Investments Not Paying

Non-Core, International Investments Not Paying

Increasing competitive pressure inside traditional monopoly utility market territories has triggered somewhat of a revival of investment diversification by gas and electric utilities. But these investments are not what they're cracked up to be, according to energy consulting firm Metzler Services, a subsidiary of Metzler &amp Associates. Non-core investments, including international ventures, did not payoff over the year ended last September, Metzler calculated in its third quarter Flashreport, released last week.

In fact, the contribution of these endeavors has been so minimal that, according to Jerry Benson, executive vice president of Metzler Services, "more than 95% of the industry's earnings continue to be derived from domestic electric and gas core services."

Companies such as Duke Energy, Dominion Resources, AEP, CMS and others have spent significant dollars on overseas investments and other non-core operations over the past few years. While there have been some notable earnings contributions from "non-core" initiatives at some companies, from an industry standpoint these have been offset by some significant losses from both the operations and the divestiture of these initiatives. The industry, taken as a whole, has yet to significantly benefit from divestiture strategies.

"A lot of [non-core investment] activity took place 10 years ago, and it didn't work out that well," said Benson. "And now there's been another movement as a lot of companies, primarily the electrics for whom deregulation is becoming a reality, have the feeling they need to diversify. It's taking two forms now: Some are going to off-beat ventures, while others are sinking a lot of dollars into international investments feeling there won't be as many constraints on the returns they can get overseas. There's been a lot of action in Great Britain, Australia and South America.

"Our view is that while it's interesting that these companies are buying this, divesting that, diversifying, what shouldn't get lost in all that is that what's going to make or break these companies in the marketplace over the next few years is how competitive they are in their traditional line of business because that's still where 95% of the earnings are coming from," said Benson. For more information contact Jerry Benson at 217-241-1450.

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