Positioning Your Utility to Maximize Selling Price in Today's World of Acquisition Mania
Abstract:If state and federal regulations are overwhelming, and you have determined to exit the utility business due to diminishing bottom lines, what actions can you take to maximize the selling price of your utility? For many, divestment of responsibility and liability for owning and operating a utility is an attractive option. This paper discusses administrative actions to enhance the value of your utility system to a prospective buyer.
In recent years, many large investor owned utilities have pursued aggressive policies of acquiring small privately and publicly owned systems which lack financial, managerial and technical resources not economically available to the utility. To the extent that a buyer has access to sound financial, operating and capital investment data, the buyer can make an informed decision as to the price that it would be willing to pay and an assessment of the ease of ownership transition. In cases where reliable data is not available, a purchaser would be inclined to discount the purchase price.
For example, a prospective buyer would be interested in whether a utility has a current inventory and adequately maintained property records that (1) present the cost of assets in service by utility account classification, (2) accounts for retirements, and (3) includes a description of each asset. Such information is valuable to a buyer whose rates are regulated by a state agency since asset cost forms the basis for earning potential.
Other book and record keeping documents include a (1) work order system, that properly records project costs associated with capital construction and overhead costs, (2) a maintenance management system showing frequency and adequacy of repairs, and (3) an environmental assessment showing no hazardous waste sites on the property.
A prospective buyer may also consider paying a premium if the system to be acquired has potential for customer growth. For example, it would benefit the system to be acquired to expand its certificated service area as an added incentive to the purchaser. Other incentives may include owning a surplus and/or acquiring additional water rights or increasing rates to recover the full cost of rendering water service, thus reducing any adverse publicity to a new owner.
Such actions may be achievable to the existing owner at moderate cost and are recoverable as a cost of providing service by a purchaser. To the extent that the transaction reduces the risk to a purchaser and reduces barriers, the value is increased.
Document Type: Research Article
Publication date: January 1, 2002
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