For utilities, international expansion can be a tricky thing. It means placing your assets in countries other than your own and essentially starting up a new business. For some utilities, international expansion is the key to growing your business and remaining successful. For others, it can be a mistake that ends up in a substantial loss of funds.
What makes a utility’s expansion successful, and what are some companies that have successfully gone beyond their borders?
In the U.S., Duke Energy is at the top of the list when it comes to utilities. The country’s largest electrical power holding company, Duke Energy is surprisingly focused on primarily the U.S.
Duke owns a whopping 58,200 MW of base-load and peak energy generation in the U.S. and services roughly 7.2 million customers. Also noteworthy is Duke’s large service area, which spans 104,000 square miles.
With such a large service area, it would make sense that Duke would want to stay put. However, the company has expanded into Latin America, Canada, and even Saudi Arabia.
Duke’s international subsidiary is called Duke Energy International and is headquartered in Houston, Texas. Most of its 4,900 MW of generation capacity are in Latin America. The company entered the region around the turn of the twenty-first century and has been highly successful ever since.
According to investing analyst site Trefis, the company has been successful in Latin America because of the region’s high growth potential and high electricity prices in the region, though drought could put Duke’s Brazilian operations—which are primarily hydroelectric—in Jeopardy.
“If the drought continues in the next year as well, it could potentially impact the margins for Duke’s international operations,” Trefis writes. “Chile has also been facing a drought in recent times and this has slowed down hydroelectric power generation in the central part of the country. If this were to persist into the future, the output of Duke’s hydro-power operations in the country could also be impacted.”
While it’s certainly a big factor in Duke’s international expansion, the utility has been very cautious about its expansion, ensuring it has a strong base of revenue in order to weather more difficult times. Duke presents a great example of a utility that’s expanding internationally in a smart fashion, while keeping its homegrown business booming.
Britain’s largest independent gas and electric supplier First Utility is also looking toward international expansion. The company, which has been around since 2008, has been increasingly successful in the U.K., but not wishes to take its services to neighboring European countries. Specifically, the group is looking toward Germany, the Netherlands, Belgium, and North America as possible areas for future international expansion.
However, in order to do that, they need the funds.
"There are things we are interested in doing like taking our business model beyond the UK. Raising some capital to do that might be something we'll consider in future," Chief Executive Ian McCaig said in a telephone interview with Reuters.
They have several options for raising the capital for international expansion, including putting the company on the open market in the form of an IPO.
While these plans are not finalized, the company certainly knows what it’s looking for in terms of somewhere to expand to.
"We are looking at markets where there's a deregulated environment coupled with a low level of price control intervention from the state," McCaig said.
Essentially, First Utility is looking for markets ready to take their energy infrastructure to the next level.
First Utility isn’t the only one looking to emerging markets for potential expansion. A number of European utilities are looking to take their business to fast-growing markets.
GDF Suez is a leader in harnessing the potential of emerging markets. Unlike Duke or First Utility, the company produces more energy outside of its home market of France. It’s the largest energy producer in the Middle East and the second largest in Brazil. The company’s chief executive, Gérard Mestrallet, believes for utilities to see continued success in the future, they need to look outside of their home markets.
“Ninety per cent of incremental energy demand will be outside the OECD,” he said. “In Europe and the US, energy demand is declining by 1-2 per cent, even though economic growth is flat.”
Italy’s Enel is also looking toward expanding into emerging markets. Since the Italian power market isn’t particularly large, the company has had to look elsewhere to be successful.
“We’ve moved from being an old lady in a small market . . . to a multinational across 40 countries,” Fulvio Conti, Enel’s chief executive, said.
One company that’s facing expansion hardships is Germany’s E.ON, who has recently expanded into Brazil and Turkey. This was preceded by an earlier move into Russia. While the expansion is certainly beneficial, analysts predict that it won’t be enough to offset E.ON’s declining profits in Germany.
Political and economic unrest in Turkey has also put some of its assets in jeopardy, as the cash flow from the country isn’t necessarily a guarantee anymore. Similar problems are being encountered in Russia.
“As a result of regulatory changes, weak demand growth and currency impacts, their returns there have been lower than expected,” Sofia Savvantidou of Citi said. “It’s too early to judge whether it’s been a success.”
So, international expansion might not be the answer for every utility, though there are certainly some for who it has been exceedingly successful.