Now that the repeal of the Public Utility Holding Company Act (PUHCA) appears more likely, CreditSights analysts have updated a list of U.S. utilities they consider top takeover candidates, again using criteria that the well heeled Oracle of Omaha, Warren Buffet, could use.

In December, CreditSights analysts Dot Matthews and Andy DeVries first looked at possible utility takeovers if PUHCA were repealed (see NGI, Dec. 23, 2002). In an analysis last week, Matthews and DeVries noted that Congress is well on its way to repealing PUHCA, making it more likely that “any company could buy a regulated utility, as it would no longer be subjected to the harsh provisions of that law.”

With PUHCA repealed, “takeover bids from Buffett and others for regulated utilities could follow pretty quickly on the heels of repeal.” CreditSights’ “Buffett top 10 list” in December had been influenced by total cost, valuation metrics, geography, a large portion of earnings from utilities, no “big” problems, ratings and debt-to-capital ratios. The December list included Alliant Energy, Ameren, CenterPoint Energy, Constellation Energy Group, El Paso Electric Co., Great Plains, Nicor, OGE Energy, Peoples Energy and Xcel Corp..

On CreditSights’ newest list, Alliant, Ameren, CenterPoint, Constellation and Xcel remain. “We still like the Buffett list names, but some of them were on because of geography or other considerations unique to Buffett, and some of our new names were left off the Buffett list because of geography or other factors.”

Criteria for the new list uses “more pure metrics,” on the theory that Buffett would not be the only buyer. Some small cap names did not make the list because they were too small or isolated and several big names also were left off because analysts believed they would only attract a few suitors.

However, Matthews and DeVries believe that deriving a large portion of earnings from utilities remains an attractive asset, along with low debt-to-capital ratios and “BBB” ratings. Still, some qualities may not be as important to potential buyers as to the “conservative” Buffett. Criteria included price-to-book ratios and equity-to-earnings before interest and taxes, among other things. “For this exercise, we tried to pick names that would appeal to the most potential buyers across the board, but there are many names with attractive metrics out there if the other criteria look good to a potential buyer.”

CreditSights’ latest top 15 in alphabetical order are Alliant, Ameren, CenterPoint, Constellation, Cinergy, DPL Inc., DTE Energy, Energy East, FirstEnergy, Northeast Utilities Inc., Pepco Holdings, Pinnacle West, Puget Energy, Wisconsin Energy and Xcel Energy.

“The names on this list are probably too big to fit Warren Buffett’s parameters, but there are companies out there that could buy them, and their metrics are attractive,” said analysts. “The largest names, Dominion and Southern, have reasonable book values, but would require a really big buyer to make things work without serious downgrades. We see Dominion as a more likely buyer than seller in this market.” Also, AEP, Duke and Entergy did not make this list because of their size, they said.

In related news, Fitch Ratings last Tuesday assigned a rating of “BBB” to Buffett’s MidAmerican Energy Holding Co.’s (MEHC) $450 million issuance of 3.5% senior notes, due May 15, 2008. Proceeds will be used for general corporate purposes. The Rating Outlook for MEHC is Stable.

“MEHC’s ratings reflect the collective cash flows and stable credit profiles of the company’s regulated electric and gas subsidiaries, which continue to post solid financial results and good operating fundamentals,” said Fitch, with regulated operations accounting for about 75% of MEHC’s earnings. Fitch’s rating also takes into account the considerable support afforded to MEHC by its principal shareholder, Berkshire Hathaway (senior unsecured rated “AAA” by Fitch). Berkshire’s total investment in MEHC is currently about $3.4 billion.

To read CreditSights analysts’ full report on utilities, visit the web site at www.creditsights.com.

In related news, Standard & Poor’s Ratings Services on Tuesday assigned a “BBB-” rating to Buffett’s MidAmerican Energy Holding Co. (MEHC), noting it expects the company “will continue to successfully manage its acquisitions as it pursues a regulated business strategy. To date, Berkshire Hathaway’s investments have given MEHC financial flexibility with excellent access to capital to pursue opportune acquisitions,” said analyst Peter Rigby.

“Should PUHCA be repealed, Standard & Poor’s expects that additional Berkshire investments in U.S. electric utilities would come in the form of a combination of pure equity and trust-preferred securities if purchase prices appear attractive. If MEHC’s actual financial performance improves against the company’s projections within the next couple of years or if Berkshire equity investments materially lower parent leverage, a rating upgrade could result.”

Fitch Ratings, meanwhile, assigned a rating of “BBB” to MEHC’s $450 million issuance of 3.5% senior notes, due May 15, 2008. Proceeds will be used for general corporate purposes. The Rating Outlook for MEHC is Stable.

“MEHC’s ratings reflect the collective cash flows and stable credit profiles of the company’s regulated electric and gas subsidiaries, which continue to post solid financial results and good operating fundamentals,” said Fitch, with regulated operations accounting for about 75% of MEHC’s earnings. Fitch’s rating also takes into account the considerable support afforded to MEHC by its principal shareholder, Berkshire Hathaway (senior unsecured rated “AAA” by Fitch). Berkshire’s total investment in MEHC is currently about $3.4 billion.

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